Changes To Tax Relief For Buy-To-Let Landlords

You may recall that I wrote about a similar topic to this around this time last year in light of a change imposed on landlords by H M Revenue & Customs (HMRC) concerning the availability of tax relief on the replacement of furniture, furnishings and appliances etc.

In the recent summer budget the Chancellor announced further plans which may affect buy-to-let landlords by changing the way in which tax relief is given to Landlords on mortgage interest and introducing new rules on tax relief for expenditure incurred on the replacement of furniture and appliances etc. within let properties.  Both of these changes could have significant implications for buy-to-let landlords but it should be noted that neither of these changes will affect landlords of ‘furnished holiday lettings’ (which have their own special definition and treatment for tax purposes).

Mortgage Interest

Under the current rules, in calculating their taxable profit from receiving rental income, landlords can deduct the full amount of any mortgage interest they pay on a mortgage taken out for the purpose of the property letting business.

The changes announced in the summer budget will restrict the amount of tax relief available on mortgage interest to the basic rate of tax only.  Landlords who are higher rate taxpayers are currently able to obtain 40% tax relief on their mortgage interest but under the new rules this will be restricted to 20% only.

To put the impact of the changes into context, take the example of a landlord who is a higher rate taxpayer and generates a surplus on his rental income of £5,000 per annum (after deducting all expenses other than mortgage interest) and incurs mortgage interest costs of £3,000 per annum.  Currently he or she will be paying income tax of £800 on the surplus of £2,000.  When the new rules take full effect in 2020, the tax liability on the rental income will increase by 75% to £1,400.  This is ignoring any potential (perhaps inevitable) interest rate rises between now and then which would amplify the level of the tax increase still further.  Depending on the level of mortgage interest compared to rents received, some landlords could be faced with a tax rate of 100% (or possibly even more!) of the surplus generated from the rentals, thereby wiping out any profit made.

The changes are due to be introduced from April 2017 but will be gradually ‘phased in’ so it will only be from April 2020 that the rules take full effect.

There is therefore some time for landlords to consider the impact of these changes on their tax position before they come in to full effect and, if possible, to try to plan accordingly.

Wear And Tear Allowance

Most landlords of fully furnished property will be aware of the above allowance which enables landlords of such property to elect to claim an annual tax deduction from their rental income equal to 10% of the rental income received (less expenses such as council tax and water rates, in some circumstances).  This tax deduction was introduced a number of years ago to give landlords a certain amount of tax relief on the expenditure they had to incur on repairing and replacing furnishings etc. due to wear and tear.

The Chancellor announced in the summer budget that he would launch a consultation on replacing the wear and tear allowance with new rules which would allow landlords to deduct form their rental income the full cost of replacing furnishings etc. from their rental profits as and when such expenditure is incurred, rather than an annual deduction of the 10% ‘wear and tear allowance’.

The new rules are intended to apply to furniture, furnishings and appliances etc. such as beds, suites, fridges and freezers, carpets, curtains and televisions etc. but will only apply to expenditure incurred on replacing such items, not the original purchase of them.

For those landlords who provide accommodation which is unfurnished or partly furnished, you will be pleased to hear that the intention is for the new rules to apply to you, too.  This could potentially overcome the issues about which I wrote last year, where HMRC announced the removal of tax relief for such expenditure.

The above is for general guidance only and no action should be taken without obtaining specific advice