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 (see below). 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.
The change to the wear and tear allowance is being made as the Government want to improve the consistency and fairness in the taxation of residential property businesses. Currently, landlords of furnished residential properties can claim the 10% wear and tear allowance, regardless of whether their actual expenditure is none, or higher than the relief given. Furthermore, the wear and tear allowance depends on the amount of rental income received. This means that where rental income is higher, the allowance is higher so that similar properties in different parts of the country claim different amounts of the wear and tear allowance, even though they may have incurred the same level of expenditure.
Under the new replacement furnishings relief from 6 April 2016, landlords can claim a deduction for the capital cost of replacing furniture, furnishings, appliances and kitchenware provided for the tenant’s use in the house such as beds, TVs, fridges and freezers, carpets, curtains, linen and crockery. Larger items, such as cars, cannot be claimed.
Tax Relief on Mortgage Interest to be Restricted to Basic Rate only
From April 2017, tax relief on mortgage interest incurred by residential landlords is to be restricted to the basic rate (20%) of tax only. This will include all finance costs (broker and arrangement fees, commission etc.) in addition to mortgage interest.
The change will be phased in gradually over 4 tax years, starting from April 2017, as follows:
2017/18 – full relief of 75% of mortgage interest; basic rate relief on 25%
2018/19 – full relief on 50%; basic rate relief on 50%
2019/20 – full relief on 25%; basic rate relief on 75%
2020/21 onwards – basic rate tax relief only on all mortgage interest
The government believes that the changes make the tax system fairer, and by gradually introducing the restriction in tax relief they are giving landlords time to adjust to the changes.
However, others see the change as unfair, particularly on some modest, middle-class savers who have prudently chosen to invest in buy‑to‑let property, often alongside pensions and ISAs, as a means to supplement their income. In fact some 35,000 people have signed an online petition calling for the changes to be reversed.
The restriction of relief on mortgage interest is expected to affect around 1 in 5 landlords. It could also marginally reduce the demand for housing, and have an impact on house prices and rent levels.
Article Courtesy of: Ward Williams