UK government proposes to tackle the buoyant buy-to-let market and perceived tax advantages by reducing tax reliefs for finance costs and wear and tear.
Both UK and non-UK resident landlords should be aware that the Chancellor of the Exchequer, George Osborne, announced changes in the Summer Budget in relation to tax relief for finance costs and the wear and tear allowance against UK rental properties; the objective being to make the UK tax system fairer in this area as well as taking the heat out of the buoyant UK buy-to-let market.
'We will create a more level playing-field between those buying a home to let, and those who are buying a home to live in' stated Osborne.
Only limited details have been released to date, with the measures outlined set to impact individuals and most likely also trusts and companies to varying degrees.
The proposed changes are as follows:
Relief for finance costs restriction
This measure will impact landlords of buy-to-let properties and will restrict the tax relief that is available for related finance costs. The new rules will not impact those with properties within the furnished holiday lets regime.
Individuals who receive rental income from residential property can currently deduct all of their finance costs, including mortgage interest, from their rental income to arrive at their net taxable profits. Depending on their personal marginal rate of tax, the individual landlord hence receives tax relief at 20 per cent, 40 per cent or 45 per cent.
The position differs for trusts, which are broadly taxed at 45 per cent, and companies at 20 per cent.
It is proposed that relief for finance costs will be restricted to a basic rate reduction from an individual’s tax liability, regardless of the rate of tax their rental profits are liable to. The tax reduction will be calculated as 20 per cent of the lower of:
- the finance costs not deducted from income in the tax year (see percentages below);
- rental profits in the tax year; or
- total income (excluding savings income and dividend income) in the tax year, after deducting available personal and blind person’s allowances.
Where the reduction is restricted to 20 per cent of the profits of the property business in the tax year, excess finance costs may be carried forward for relief in a future tax year.
It is likely that this measure will also apply to trusts, albeit no details have yet been released; however, basic rate taxpayers and corporate landlords will be unaffected, being taxed at 20 per cent. Subject to other tax and commercial issues we may see more landlords using company ownership going forward, particularly with corporate tax rates due to fall further to 18 per cent.
We are not expecting any consultation on this new measure, which will be phased in over a four year period from 6 April 2017, raising an estimated £1.3bn in tax by 2020-21.
|Tax Year||% of finance costs
deductible against rents
|% of finance cost eligible
for basic rare tax reduction
Wear and tear allowance relief to be removed
This measure will impact landlords who rent furnished properties to tenants.
Landlords can currently claim a 10 per cent wear and tear allowance as a deduction from their rental profits. The allowance is claimed instead of claiming relief for the cost of replacing fixtures and fittings and is calculated as a percentage of rents received.
It is proposed to abolish the wear and tear allowance and replace it with a new system where landlords will be able to claim a deduction for the actual costs they incur in maintaining and refurbishing the property.
Those with properties within the rules for furnished holiday lets can continue to claim capital allowances.
The new regime will be effective from 6 April 2016 and details of the new system will be determined following the outcome of a technical consultation expected during the summer of 2015.
It is advisable that all landlords review their rental property positions in light of the above proposed changes, including their tax calculations. More meticulous record keeping will also be required going forward.
RSM can provide tax advice on property rental structures for landlords, and tax calculations including the preparation of non-residents’ tax returns. Please contact us if you require further information.