If you’re someone who rents out residential property – or you’re considering it – it’s important to take stock of some important changes in the July Budget.
‘Buy to let’ tend to be the three little words to make investors go weak at the knees. For a number of years now, becoming a landlord has been seen as a clever ploy. Indeed, people purchasing property with the aim of renting it to tenants have almost certainly been playing a significant part in the recent property boom.
The Chancellor’s announcements in the July Budget, however, mean that the financial calculations will be a little more complex. Higher-rate tax payers may have particular cause for concern, because there are now going to be restrictions on the amount of tax relief applicable to mortgage interest.
The changes will be phased in from 2017/18 and the following four years, allowing time for landlords to adjust. In the first year, 75% of the interest can be relieved at the higher rate, while the remaining 25% is allowed at 20%, which will come off the person’s net liability as a tax reducer. The tax reducer may also be restricted by some limitations. Any excess finance costs may, however, be carried forward in certain circumstances.
In 2018-19, the ratio becomes 50/50. That means that 50% of the interest is relieved at the higher rate and the other 50% at the 20% rate. The year afterwards, the percentages are 25/75 and by the time we reach the tax year 2020-21, there is no higher-rate relief at all.
There’s another issue which you may want to discuss with your accountant too.
From April 2016, the ‘wear and tear’ allowance for landlords will be abolished. This straightforward system previously meant that when a property had been let fully furnished, the landlord could claim 10% of the rent as a deduction in profit – in lieu of white goods and furnishings supplied to the tenant. This could happen each year as a matter of course, regardless of the actual state of the furnishings. Under the new rules, you’re only allowed the cost of actual replacement of goods – a new fridge freezer, for example.
If you’re planning on becoming a landlord on a smaller scale, however, and are just intending to rent out a room in your home, there’s some good news. Whereas previously only £4,250 of the annual rental income was tax free, the figure is rising to a more realistic £7,500. An incentive perhaps from the government to help solve wider issues in the housing market.