Please Note: This Article is 7 years old. This increases the likelihood that some or all of it's content is now outdated.

Residential landlord tax allowances have come under fire as Summer Budget brings major changes, but here tax accountants Ormerod Rutter explain these changes and how they will affect the average landlord.

A number of measures announced in July’s Summer Budget will have a significant impact on the tax liability for residential landlords in the UK.

The new measures will be introduced as part of sustained activity that, according to HMRC, “will ensure that landlords with higher incomes no longer receive the most generous tax treatment”.

These measures include:

  • Restriction of tax relief to the basic rate (20%) for loan interest on funds raised to purchase residential property for letting
  • Abolition of the 10% wear and tear allowance

Tax relief for loan interest to be restricted to the basic rate of 20%

Currently, residential landlords can deduct financial costs when calculating their annual rental profit – which means they receive tax relief at their marginal tax rate, giving additional rate taxpayers 45% tax relief.

However, From April 2017 tax relief on financial costs incurred on residential property (excluding furnished holiday lettings) will be restricted to the basic rate of tax (20%) on financial costs. The changes will be phased in over four years starting in 2017, but this could significantly increase the tax liability for some landlords.

Download – Ormerod Rutter’s guide to the new rules for interest relief to find out more.

Abolition of the 10% wear and tear allowance

The existing 10% wear and tear relief will be replaced from April 2016. A new ‘replacement furniture relief’ will take its place, which will be available to landlords of unfurnished, part furnished and furnished properties.

Residential landlords will be able to claim a tax deduction for the capital cost of furniture, furnishings, appliances and kitchenware provided for tenant use under this new relief, but the initial cost of furnishing a property will not be included. This will also exclude ‘furnished holiday letting’ businesses and commercial properties, which receive relief through the Capital Allowances regime.

Landlords who are considering replacing qualifying items for furnished residential let property in the current tax year (2015-16) may be advised to defer expenditure until after 5 April 2016. They may be able to maximise their claim to the present 10% wear and tear allowance for 2015-16, and be able to claim the new relief from 6 April 2016, however it is recommended that they seek professional advice to ensure this is done in the most efficient way.

The Summer Budget announcement did bring some good news however, as it included a much welcomed rise in the rent-a-room allowance to £7,500 from April 2016.

This increase is a welcome change, as the allowance has remained at the same level for the past 18 years. From April 2016, under the rent-a-room scheme, ‘lodger landlords’ will be able to make up to £7,500 a year without paying tax by renting out a furnished room in their house.

However, there can be a fine line between renting out a room and regularly taking in paying guests, which can been seen as business income and may require you to file a tax return. If you’re unsure whether or not you qualify for the scheme, seek the advice of an accountant.

These changes are likely to have an impact on the financial affairs and tax liability of many residential landlords in the UK. The potential increase in the tax bill is likely to make using a company to hold let properties a more attractive prospect for those with larger property portfolios.

Ormerod Rutter Chartered Accountants have a specialist tax team with experience of helping landlords structure their affairs in the most tax efficient way possible. If you would like further information about how the changes will affect you, please contact us to arrange a free initial consultation.

Please Note: This Article is 7 years old. This increases the likelihood that some or all of it's content is now outdated.



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