In a recent article, we discussed an important part of this year’s Summer Budget, dividend reformation. Today we discuss another important aspect of the budget, Landlords Wear & Tear Allowance.
The landlords wear and tear allowance may be a big contributing factor towards the income tax you may pay. If you own a furnished let property you are probably claiming a wear and tear allowance which equates to 10% of the annual rent, less council tax & water rates.
|Rent received in tax year ended 5th April 2015:||£15,000|
|Council tax paid:||£1,500|
|Wear and tear allowance at 10% on:||£13,500|
Therefore the additional expense for wear and tear totals £1,350 as an expense to be offset against land and property profits in this example.
HMRC have stated this allowance will be abolished from the start of the 2016/17 tax year.
In replacement of this allowance, the usual items you could not claim as a result of the wear and tear allowance are now available to claim as a revenue expense year on year. These items include the following:
- Furniture (Beds, Sofa’s)
- White goods (Washing Machine, Kettle, Toaster etc)
The primary target of this change will be landlords who own various properties with a higher level of rent being charged to tenants, this will mean they will see an increase in profit levels as the wear tear and allowance will no longer exist. For the higher rate taxpayer this will not be greeted with joy and the appeal of sheltering properties in a company becomes increasingly more attractive.
Aston Shaw’s view is; despite availability to claim these goods, this will not substitute the significant deduction the wear and tear allowance offered. The net effect will see an increase in profit for most landlords.
Rent a room allowance:
Rent a room allowance has always been a declaration on the tax return to show a tenant living at your main residence in a single furnished bedroom, of which you could be paid £4250.00 of rent tax free. This amount has been revised to £7,250.00 from 06th April 2016.
Mortgage Interest Tax Relief Changes:
The summer budget introduced further changes which will affect landlords who hold mortgages on properties they own. The loan interest expense affecting a vast majority of taxpayers land and property profits. HMRC has stated they are including a limitation to how much tax relief the higher rate taxpayer can claim with effective from the 06th April 2017.
For landlords who are higher rate taxpayers, the availability to offset the loan interest has always been a favourable and very common expense in the property market.
HMRC introduced a diminishing effect over 4 years, with the end result concluding that only basic rate tax relief is available as a deduction in profits, below is table and example to reflect these changes.
Note: If you are a basic rate taxpayer, you will see no varied declaration in profits on your self assessment tax return.
Tax year loan interest incurred
Available as higher rate deduction (40.00%)
Available as basic rate deduction (20.00%)
|Year ended 05th April 2017||75.00%||25.00%|
|Year ended 05th April 2018||50.00%||50.00%|
|Year ended 05th April 2019||25.00%||75.00%|
|Year ended 05th April 2020||0.00%||100.00%|
Below is an example of a higher rate taxpayer for the 2017/18 tax year.
Total loan interest paid of £5,000.00 during tax year.
Tax relief available at 40% on £3,750.00 = £1,500.00 reduced tax due.
Tax relief available at 20% on £1,250 = £250.00 reduced tax due.
The overall deduction in taxable land and property profits is £1750.00, whereas if the overall expense was available at the 40% relief, the expense would have been £2000.00. A increase in £100.00 of tax for the higher rate taxpayer.
Disclosure of the apportioned relief via the tax return will be presented differently as HMRC expect a separate entry to disclose the allowance claimed at the basic rate band.