George Osborne presented the first Budget of this Parliament on 8 July 2015. As a landlord of residential property, there are some important proposals that you need to be aware of.
Withdrawal of wear & tear allowance – from 6 April 2016, the ‘wear & tear’ allowance that allowed landlords of furnished residential properties to claim a deduction of 10% of their net rents is to be abolished. It will be replaced by allowing a deduction based on the actual cost of replacing furnishings. The cost of the original furnishing will not be allowable and care needs to be taken when looking at what “furnishings” are covered. The advice to landlords who currently claim the wear and tear allowance will be to try and avoid replacing such items before 6 April 2016.
Tax relief on mortgage interest incurred by residential landlords to be restricted to basic rate only – the finance costs (mortgage interest, arrangement fees, etc.) of landlords will be restricted to the basic rate of tax. This change will be phased in over 4 tax years, starting from April 2017.
New regime of dividend taxation of property investment companies (and other companies) – with effect from 6 April 2016, the dividend tax credit is to be withdrawn. Instead, the first £5,000 of dividend income will be tax-free (although it will utilise the basic rate tax band), with new dividend tax rates applying as follows: ordinary rate 7.5%; upper rate 32.5%; and the additional rate of 38.1%. By way of comparison, the current effective tax rates of dividends (once the dividend tax credit is taken into account) are 0%, 25% and 30.56% respectively. Based on the rates that are coming into force, it is worth considering whether dividend payments should be accelerated and paid before 6 April 2016 to take advantage of the lower rates of tax, particularly where dividend income forms the majority of a taxpayer’s income. This will need to be looked at closely to take all issues into account, such as the impact of the £5,000 dividend tax allowance, the taxpayer’s current marginal tax rates and the distributable profits held by the company.