What you need to know if you’re a landlord
New restrictions on allowable expenses from rental income came into effect on 1st April 2016. The wear and tear allowance has been replaced by a new expenses system.
The past wear and tear allowance allows landlords to deduct (broadly) 10% of their rental income in calculating taxable profit to allow for wear and tear. However this allowance has been replaced by a system allowing landlords of residential property to deduct only the actual costs incurred on replacing furnishings in the tax year.
Capital allowances for furnished holiday lets will not be affected. A technical consultation will be published later in the year to consider this further.
All landlords of residential property in or outside the UK, are permitted to claim relief for finance costs (e.g. mortgage interest) incurred on their let property, giving tax relief at 40% and 45% for landlords paying tax at the higher and additional tax rates. This tax relief will be restricted to the basic rate of income tax only (20%).
Implementation will be phased from April 2017 as follows:
- 2017/18 – the deduction from property income will be restricted to 75% of finance costs with the remaining 25% available at the basic rate.
- 2018/19 – 50% of finance costs available for full tax relief and the remaining 50% available at the basic rate.
- 2019/20 – 25% of finance costs available for full tax relief and the remaining 75% available at the basic rate.
- 2020/21 – all financing costs incurred by a landlord will be given as basic rate tax reduction.
Who will be affected?
- All landlords of furnished residential properties will be affected by the replacement of the wear and tear allowance to the new system.
- Landlords of residential properties paying tax at the higher and additional rates will be affected by the restriction of finance costs, excluding those with qualifying furnished holiday lets.
For further guidance go to GOV.UK
Deloitte UK give their view of the changes
The abolition of the wear and tear allowance and replacement with a new set of rules will be more aligned to the actual expenses incurred in the year, and we look forward to hearing more when the technical consultation is issued.
The restriction of allowable finance costs will align the allowable expenses for all landlords irrespective of their tax paying status which will clearly be an unwelcome change for higher and additional rate taxpayers, but the phased implementation will go some way to soften the blow.
Details from original article Rental property allowable expenses by Deloitte UK