Changes in the taxation of property income from letting residential property
There have been a number of changes in the taxation of income from residential property which will be introduced over the next 5 years. The key changes are shown below. Please note that none of these changes apply to holiday let property businesses.
An increase in the rent-a-room allowance.
Presently, you can earn up to £4,250 per annum tax free from letting furnished accommodation in your home. This amount is halved if you share this income with anyone else. From 6 April 2016 the £4,250 limit increased to £7,500.
The abolition of the wear and tear allowance.
The government have indicated that they will be replacing the 10% wear and tear allowance with a new replacement furniture relief from April 2016.
The gradual restriction of higher rate income tax relief for finance costs.
The new measure will gradually restrict tax relief for finance costs to purchase residential properties by landlords, to the basic rate of income tax. From 6 April 2020 landlords affected will no longer be able to deduct their finance costs from their property income. Instead they will receive a basic rate deduction from their income tax liability.
It is important to note the gradual reduction in tax relief that will be available for finance charges. Many property business owners have built their portfolios by maximising the loan to value relationship – they have borrowed as much as the market will allow in order to fund expansion. Landlords have also relied on securing tax relief at their highest rate in order to cover the net, post tax, finance charges from their rental income.
Unfortunately, higher rate tax relief on finance costs is to be withdrawn. By 2020-21, you will only qualify for a basic rate deduction.
The impact of this change will be to increase the after-tax, cash cost of finance charges.
If you believe you will be adversely affected by these changes, and would like to discuss this with us, please contact us on 01332 365855 or email enquiries@batesweston.co.uk.
For more information on the impact on Buy-to-Let interest read our factsheet. You may also find our section on investment property ownership of interest.