There are a few key changes to the way in which property income will be taxed from April 2016 and April 2017.
The major change which will impact many landlords is a restriction of tax relief on interest in respect of let domestic property. Currently, it is possible to offset interest on a mortgage against rental income, as one of many allowable expenses. This is set to change from April 2017. From April 2017, tax relief on interest will be restricted so that by 2020, interest will receive a maximum tax relief of 20%. Rather than the interest being treated as an allowable deduction when calculating net rental income, the loan interest will attract tax relief at 20%.
The change will be phased in from 2017/18 to 2020/21, and during these years, part of the interest will be treated as an allowable deduction (as currently is the case), and part will be given as a tax relief; ultimately finalising in 2020/21 with 100% of the interest given as a relief of 20% with no deduction from property income.
Property owners who are basic rate tax payers, or those who have a low level of interest in relation to borrowings, will not be significantly impacted by this change. However, those who are higher rate or additional rate payers will potentially see a fall in the relief which they are currently in receipt of, and as such an increase in their tax bill.
Those with significant property portfolios and/or with higher debt levels may need to consider their business model, and whether incorporation may be preferential. Other considerations may be paying off loans as far as possible, or – more significantly – selling up.
Other changes
From April 2016 the current availability of simplified expense deduction of wear and tear allowance will be removed, and landlords will only be able to deduct when they actually spend money. Again, this may lead to an increase to taxable property income, and will certainly warrant a need to keep hold of all receipts and records to ensure maximisation of relief.
On a more positive note, ‘Rent a Room’ relief is rising from £4,250 to £7,500. Simply put, ‘Rent a Room’ relief allows those renting a room in their home an immediate deduction, and this relatively sharp rise will potentially encourage further home owners to consider this scheme. Note that B&B establishments are also able to benefit from this relief so long as the owners live in the property.
If you have a second property of a portfolio and would like to discuss the implications for you, please get in touch with Mel or Steve.