Changes to the UK property taxation
Tinkering with the overly complicated UK tax code has become a fashion now but this one can have serious tax consequences for the landlords
By: Tax Partners
LONDON - Feb. 4, 2017 - PRLog -- Looks like tinkering with the overly complicated UK tax code has become a fashion now. One of the latest changes to hit the code concerns property taxation, a minefield on its own. Whilst changes to the tax laws do keep the tax advisors on their toes, the recent changes can have serious tax implications for the landlord clients.
Wear and tear allowance
Historically, landlords letting out furnished residential property could claim 10% of the rental amount (called 'wear and tear allowance') as a deduction to compensate for the periodic replacement of furnishings whether or not they were actually replaced. However, a higher replacement cost than the allowance in a year would not result in a higher (than the 10%) relief. Since this allowance was proportionate to the rental income received, suddenly it occurred to the taxman that with property rents hitting the roof, the landlords were having an unfair advantage in that it was an allowance not linked to any actually spend. This has given the taxman an opportunity to tinker once again with the tax laws. So, the wear and tear allowance has now been abolished effective 06 April 2016. In its place we have what is called 'replacement domestic items relief'.
Replacement domestic items relief
This relief available from 06 April 2016 applies to all sorts of property let whether fully or partly furnished, or even unfurnished but is not available to furnished holiday lets. Typically, domestic items would include white goods, curtains, beds, linen, crockery or cutlery and fixtures such as baths, toilets, fitted kitchen units, boilers, etc. The relief apples only to replacements and not to the initial cost of purchasing the items; neither would it apply if the replacement resulted in substantial change in the material or quality. As common with other areas of taxation, this relief is subject to a formula whereby the reduction is limited to the cost of the replacement item less any element of improvement, and as reduced by the sale proceeds of the old item.
Restricting finance cost relief
Coming as a shocker to the profession of tax accountants and tax advisors, the relief in the form of deduction available against finance costs paid by landlords that let residential properties has been restricted to the basic rate of Income Tax, and it is being phased in from April 2017. Historically, full finance costs incurred (whether mortgage interest, incidental costs such as arrangement fees, refinancing fees or legal costs) were allowed as a deduction from property income before taxable rental profits were worked out. This change means that all finance costs will no longer be allowable as an expense whilst calculating the taxable profits. The new measure will phase in the restrictions over the next four years such that 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. In other words, for the tax year 2017-18 finance costs allowable will be restricted 75%, with 25% being available as a basic rate income tax deduction. For 2018-19, this will be 50%/ 50%, and for 2019-20, restricted to 25%/75%. From 06 April 2010, finance costs will be available as a tax relief limited to the basic rate which would be 20% of the costs incurred. Perhaps the unintended consequence of this measure is that a landlord with a large portfolio of buy-to-lets for example could be pushed into the higher tax band since his taxable income will be high, deduction for finance costs no more being available.
Stamp duty land tax
Effective 06 April 2016 buyers of a second home or buy-to-let residential property will pay an extra 3% stamp duty land tax if the property bought was located in England, Wales, Northern Island and now Scotland as well. This extra 3% applies even if you didn't own a property in the UK (for e.g., you owned one abroad) or you buy it in your partner's or child's name who doesn't own a property, provided the property costs £40,000 or more. The only exemption from this charge is where one is replacing his or her main residence.
From 06 April 2016 the rent-a-room relief has been increased from £4,250 to £7,500. Basically, anyone who rents out a furnished room to a lodger where the rental income doesn't exceed £7,500 won't pay tax on the income. One need not be a homeowner to take advantage of the allowance, even if one is renting one could lease out a room to a lodger, as long as the lease terms allow you to do so. Maybe, after all the shockers in the form of stamp duty and finance cost relief, this is a measure aimed to tone down the impact!
Tax Partners, Chartered Certified Accountants
Page Updated Last on: Feb 06, 2017