A brief summary :
From 6 April 2016:
- Rent-a-room relief to be raised to £7,500
- The 10% wear and tear allowance may be reformed (subject to consultation)
From 6 April 2017:
- Higher rate relief on mortgage interest will be restricted for buy-to-let landlords.
Rent a room relief
The applies to private landlords, the owners of guest houses, B&Bs and similar establishments, provided that they use the property as their main or only home.
- From April 2016, the exemption will increase to £7,500 per household (years to 2015/16 £4,250 per household).
- As previously, there will be no requirement to declare income if it is below this threshold.
Wear and tear allowance
Subject to a new consultation, from April 2016, the ‘wear and tear allowance’, which allows landlords to deduct 10% of adjusted gross rent as a type of furnishings depreciation will also be replaced by a new system that only allows them to get tax relief when they replace furnishings..
Restricting mortgage interest relief
The Chancellor proposes to restrict tax relief for mortgage interest on buy-to-let property.
- Mortgage interest may be deducted from rents income to arrive at profit or loss for tax purposes.
- Income tax relief is given at a taxpayer’s marginal rate of tax. E,g, it is worth 45p for every £1 for an additional rate taxpayer.
- Mortgage interest relief is restricted to the basic rate, and given as a tax reduction, not an allowable expense. This measure is to be phased in between 2017 and 2020.
- Individuals will be able to claim a basic rate tax reduction from their Income Tax liability on the portion of finance costs not deducted in calculating their rental profit. This tax relief will be calculated as 20% of the lower of the:
- finance costs not deducted from income in the tax year (25% for 2017 to 2018, 50% for 2018 to 2019, 75% for 2019 to 2020 and 100% thereafter)
- profits of the property business in the tax year
- total income (excluding savings income and dividend income) that exceeds the personal allowance and blind person’s allowance in the tax year
Any excess finance costs may be carried forward to following years if the tax reduction has been limited to 20% of the profits of the property business in the tax year.
Staggered introduction: the change will be introduced gradually from April 2017.
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David K Crossley CTA, ATT
Member of the Chartered Institute of Taxation