Buy to Let Property – what do you need to know about tax changes?

September 19, 2017

The Key changes

• Wear and Tear Allowance no longer available
• Interest rate restriction for higher tax earners from 2017-18
• Digital records will need to be kept from April 2019 (where turnover from rented properties > £10,000). This excludes limited companies

Wear and Tear Allowance

From 6 April 2016 the 10% wear and tear allowance will no longer be available. The allowance was calculated as 10% of rental turnover, with adjustments for any utility/rates costs borne by the landlord.

As an example, a landlord with rental income of £7,500 will see their taxable rental profits increase by £750 for the 2016-17 tax return

From 6 April 2016 landlords are only able to deduct the actual costs of replacing furnishings (any improvement element will be be disallowed).

Tax relief is given against a landlord’s rental income for:

• The cost of the replacement item
• Less the cost of any element of improvement (beyond the nearest modern equivalent)
• Less any proceeds of sale of the old item
• Plus any costs of disposing of the old item

Relief is given for ‘domestic items’ which includes:

• Moveable furniture
• Furnishings such as carpets, curtains and linen
• Household appliances such as fridges and freezers
• Kitchenware such as crockery and cutlery
• Televisions

Items must be provided solely for the use of the tenant within the residential property. Relief is not available if rent a room relief (renting a room in your own property) is claimed.

Interest rate restriction for higher tax earners (2017-18 tax return onwards)

Landlords will no longer be able to deduct all of their finance costs from their property income.  Instead they will receive a basic rate tax reduction from their tax due (see illustration below).

• This will affect higher rate earners (loss of personal allowance and more tax at higher rates).
• It may push basic rate earners into higher rate.
• It could also affect child benefit claims if gross income is pushed over £50,000.

New rules are being phased in from 6 April 2017 :

• 2017/18: deduction of interest restricted to 75% of the total from rental turnover.  25% of interest available as a basic rate reduction
• 2018/19: deduction of interest restricted to 50% of the total from rental turnover.  50% of interest available as a basic rate reduction
• 2019/20: deduction of interest restricted to 25% of the total from rental turnover.  75% of interest available as a basic rate reduction
• 2020/21: All interest given as a basic rate reduction

Illustration:

2016/17:

£95,000 salary

£20,000 rental turnover and £15,000 interest costs

£11,000 personal allowance

Taxable income: £95,000 + £20,000 – £15,000 – £11,000 = £89,000

£32,000 @ 20% + £57,000 @ 40% = £29,200 tax

2020/21:

Same salary and rental figures

Gross income: £95,000 + £20,000 = £115,000

Personal allowance affected (income over £100,000) so only £3,500 (goes down by £2 for every £1 that income is over £100,000)

Taxable income: £95,000 + £20,000 – £3,500 = £111,500

£32,000 @ 20% + £79,500 @ 40% – £15,000 @ 20% (this is the interest given basic rate relief) = £35,200 tax

2016/17: £29,200 tax versus 2020/21: £35,200 tax – £6,000 higher!

Digital records

Landlords with rental turnover over £10,000 will need to invest in an accounts system that can send quarterly records to HMRC from April 2020. This will be an additional cost to the business of renting property as an unincorporated business.

If you would like to talk more about the changes to let property and how it might affect you, please call or drop me an email.