Mortgage interest relief
Landlords with buy to let mortgages can currently offset the interest on their monthly mortgage repayments against the income tax they are charged on the rent they receive. This is particularly beneficial for higher rate and additional rate tax payers who pay tax at a marginal rate of 40% or 45%.
The Chancellor has announced that tax relief on mortgage interest for buy to let residential properties will be restricted to the basic rate of income tax (i.e. 20%) This will be introduced gradually from April 2017.
10% wear and tear allowance
At present, landlords can claim an automatic 10% tax deduction from profit arising on their rental properties to allow for annual wear and tear. This allowance is being completely scrapped from April 2016. After that, landlords will only be able to deduct the expenses they actually incur.
Insurance premium tax
This is set to increase to 9.5% from 6% and will affect all business insurances including landlord buildings and contents cover.
Rent a room relief
There was some good news for those who rent out a room in their home and qualify for the "rent a room" relief scheme. This relieves landlords from paying income tax on rent received from letting a furnished room (or a floor) in their main home up to a defined threshold. That threshold has been frozen at £4,250 since 1997 but is increasing to £7,500 as of 6 April 2016. Where the income is shared with a partner or someone else, this threshold is halved.
Impact and planning
Of all of these changes, the biggest impact will be on higher and additional rate taxpayer landlords. For those who do fall into this category, there are opportunities to review the way in which the property is held and how the rent is allocated. There may be particular opportunities for tax savings for couples where one party's earnings are lower and who consequently pays tax at a lower rate. Equally, corporate structures may be explored, particularly given that corporation tax rates are set to reduce from 20% to 18% by 2020.
In terms of the abolition of the wear and tear deduction and the increase in the rent a room relief allowance, we can help with the completion of your annual tax returns and discuss your situation with you to consider the most tax efficient way of managing your investment and returning the income to HM Revenue & Customs.