By D.R.E. & Co Chartered Accountants
Notwithstanding the increasing changes in the regulatory obligations that landlords have been required to observe in recent years, there have also been quite radical changes to the way in which their property businesses are taxed. This fact sheet highlights two of these changes and offers strategies to minimise their effects.
Finance charges – loss of higher rate tax relief.
Far and away the most publicised change is the gradual withdrawal of Income Tax relief at the higher rates for finance charges and mortgage or loan interest.
Starting in April 2017, and completing 6 April 2020, finance charges are being progressively disallowed as a deduction when calculating profits for tax purposes, and will be replaced by a basic rate tax credit.
2017-2018: The deduction of allowable finance costs is restricted to 75%, with 25% being available as a basic rate Income Tax deduction.
2018-2019: The deduction of allowable finance costs is restricted to 50%, with 50% being available as a basic rate Income Tax deduction.
2019-2020: The deduction of allowable finance costs will be restricted to 25%, with 75% being available as a basic rate Income Tax deduction.
Higher rate taxpayers will likely see a year-on-year increase in their annual tax bills. Landlords who were previously considered basic rate taxpayers could be promoted to be higher rate taxpayers, and this would occur even if rental profits stayed the same. This again would result in increased Income Tax bills.
Wear and Tear allowance exits.
Since 2016, the 10% of rents wear and tear allowance was abandoned in favour of a new replacement furniture relief (RFR). The new relief does what it says on the tin, it allows you to write off the cost of replacing furniture, subject to a like for like condition. Reviewing replacement furniture and equipment purchase to qualify for RFR is essential.
A changing landscape for buy-to-let landlords will undoubtedly become an area of concern for many taxpayers. Careful tax planning and advice is an essential tool to ensure any new rules that impact landlords do not create an avoidable headache.
By Rebecca Jones ACA CTA, D.R.E. & Co Chartered Accountants, Wrexham Technology Park, Wrexham, LL13 7YP Tel: 01978 310600 www.dre.co.uk