Major changes to two of the principle forms of tax relief available for landlords will see tax bills going up over the next 5 years.

10% Wear & Tear Allowance
Prior to 6th April 2016 landlords who let furnished property were entitled to claim tax relief for the wear and tear of the furniture they supplied. This was given as 10% of the rent they received (after deducting council tax, water rates etc.), which could be a significant tax saving. However, from 6th April 2016 this relief has been replaced with a new relief whereby a landlord of a furnished property can claim the cost of replacing the actual asset, eg. if you buy a new fridge for the property you let you can claim the full cost against the rent. Which is great if you spend more than 10% of the rent you receive each year on replacing existing assets, but if you don’t then your tax bill has gone up.

Mortgage interest
The government has announced changes to the way tax relief is given on mortgage / loan interest paid by landlords. Up to April 2017 relief is given at whichever rate of tax you pay, so if you’re a higher rate taxpayer you save tax at 40% on the mortgage interest. From April 2017 this all changes, as a limit on tax relief on mortgage interest is phased in over the next four years. Effectively, the rate on which you save tax will be restricted to 20% regardless of the rate of tax due on the rental income. This means for a higher rate taxpayer your tax relief will halve by 2020/21.

The way the tax relief is given will also change. Instead of being a deduction from rent to calculate taxable profit, the tax relief is given as a tax credit deducted from the tax due. This means that your total income will increase as the mortgage interest you are charged is no longer deducted from your rental income.

For basic rate taxpayers there should be no change to the actual tax due but as your total income increases Tax Credits could be affected and the High Income Child-Benefit Charge may come into play.

Please contact us on 01642 244 090 if you wish to discuss the tax implication of the above in more detail.