New tax rules affecting landlords and their profit
23 June 2017
It won’t be far-fetched to say that it is presently not the best of times for landlords considering the new rules that have been made by the government which brings about wave after wave of tax measures.
This article aims to highlight the new changes to the rules and brings some much-needed clarity to dark areas of the latest changes. However, as a result of the comprehensive nature of the new changes, it will be impossible to give an in-depth exposition of the new rules, but we will do our very best to focus on the most relevant areas. Since there is no one-size-fits-all solution to matters of taxation, if you are very concerned about the new rules and the effects they may have on you, it is advised that you seek to get your own tax advice.
Following the chancellor’s decision to cut mortgage interest relief, landlords may in the future find it difficult to make a profit. In the past, property owners could offset the cost of the mortgage interest from the income they get from rents when they calculate their profits. So for example, if a landlord obtains rental income of £20,000 but spends £19,000 as payment for mortgage interest, the profit would be the difference between the two, which in this case is or £1,000.
Following the changes made to the rules, landlords can no longer deduct all their mortgage interest when they calculate their profits. In its stead, mortgage interest tax relief will gradually be reduced to 20% between 2017 and 2020.
So in the above scenario, our landlord with rental income of £20,000 and £19,000 of mortgage interest to pay, will, following the new rules have to pay the full amount of tax due, less a 20% credit on the mortgage interest.
It doesn’t end there. Tighter measures were also imposed on wear and tear allowance by the chancellor. The old rules made it possible for landlords to write off 10% of their rental profits even if they did not spend money on repairs or replacements. This means that if a landlord lets a rental property out as fully furnished, he or she could claim a 10% wear and tear allowance whether or not they expended money in that regard. HMRC defines the words “fully furnished” as “one which is capable of normal occupation without the tenant having to provide their own beds, chairs, tables, sofas and other furnishing, cooker, etc.” But the new changes which came into force on 6th April 2016 put an end to this practice and birthed a new system that came into effect in the 2016/2017 tax year. This system provides that landlords will no longer be able to claim a flat rate allowance. They will only be able to claim the cost of replacing the furnishing but not the initial cost.
It is noteworthy that these new changes do NOT apply to furnished holiday lets because of their special tax treatment and so, they continue to benefit from the old rules.