Residential Lettings and the Summer Budget

Property Self-Employment

The current tax year (2015/16) has been interesting with not one, but two budgets. The ‘Summer’ Budget brought some dramatic changes, which will have a direct impact on individuals and companies owning UK residential properties. Below provides you with information on those changes and details when these will come into effect:
10% Wear and Tear Allowance
This was available to claim where an individual or corporate body rented out a residential property on a furnished basis. In order for a property to qualify as furnished, the property needed to have been let on the basis that all the tenant needed to do was turn up with a suitcase of clothes. A property let on a furnished basis would have furniture made available, cutlery, curtains, white goods etc made available to the tenant. The allowance was provided to cover yearly wear and tear on furnishings provided to the tenant. The allowable deduction was a yearly election and is based on 10% of gross rents, less any services provided that would normally be paid for by the tenant (for example council tax paid for or TV license).

The Suggested change
The ‘Summer Budget’ announced that the 10% wear and tear allowance will be removed with effect from 6 April 2016 for Individuals and 1 April 2016 for companies and instead landlords will be able to deduct the cost of replacing any furnishings within the property. As with any significant changes, HM Revenue & Customs (HMRC) have released consultation notes and have requested input from all interested parties on the changes. HMRC intends to publish responses on the consultation later on in the year with draft legislation being published before 6 April 2016. HMRC’s intentions are to make the tax system fairer by having landlords deduct for costs on furnishings actually incurred (less any proceeds received from the old asset that is being replaced), within the property. It is important to note that initial costs incurred on furnishing a property will continue to be disallowable. Any furnishings that have been replaced and are a significant improvement to what was previously provided will be restricted to remove the improved cost element. With these possible changes coming into effect, it will be imperative for landlords to keep detailed records on what furnishings have been replaced and the costs incurred.

Finance costs for Landlords
Currently landlords are allowed to deduct all interest costs on any finance used against the letting property.

The Change
The ‘Summer Budget’ announced that the allowable interest will be restricted, with changes coming into effect from 6 April 2017 and further changes stagnated over a four year period. Below is a table detailing these changes:

Tax Year Deduction from rental income Basic rate tax reduction from income tax
2017/18 75% of loan interest 25% of loan interest x 20%
2018/19 50% of loan interest 50% of loan interest x 20%
2019/20 25% of loan interest 75% of loan interest x 20%
2020/21 0% of loan interest 100% of loan interest x 20%

*These changes will not affect furnished holiday lettings.
From 2017/18 the rental accounts will only allow 75% of interest costs, in addition to this, individuals will receive a tax reducer of the unrelieved interest (25%) @ 20%. Any excess finance costs can 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.
For further information, or to discuss your options please contact Paul Dell on paul.dell@raffingers-stuart.co.uk.