Changes to the UK property taxation

Press Release ( - LONDON - Feb 04, 2017 - Looks like tinkering with the overly complicated UK tax code has become a fashion now. One of the latest changes concerns property taxation, a minefield on its own. Whilst changes to the tax laws do keep the tax advisors on their toes, the recent changes can have serious tax implications for the landlord clients.

Wear and tear allowance

Historically, landlords letting out furnished residential property could claim 10% of the rental amount (called ‘wear and tear allowance’) as a deduction to compensate for the periodic replace of furnishings whether or not they were actually replaced. Consequentially, a higher replacement cost in a year would not result in a higher (than the 10%) relief. Since this allowance was based on the rental income, suddenly it occurred to the taxman that with property rents hitting the roof, the landlords were having an unfair advantage in that it was an allowance not linked to any actually spend. This has given the taxman an opportunity to tinker with the tax laws. So the wear and tear allowance has been abolished effective 06 April 2016. In its place we have what is called ‘replacement domestic items relief’

Replacement domestic items relief

This relief available from 06 April 2016 applies to all sorts of property let whether fully or partly furnished, or even unfurnished but is not available to furnished holiday lets. Typically, domestic items would include white goods, curtains, beds, linen, crockery or cutlery and fixtures such as baths, toilets, fitted kitchen units, boilers etc. The relief apples only to replacements and not to the initial cost of purchasing the items; neither would it apply if the replacement results in substantial change in the material or quality. Further, the reduction is limited to the cost of the replacement item less any element of improvement, and as reduced by the sale proceeds of the old item.

Restricting finance cost relief

Coming as a shocker to the profession of tax accountants and tax advisors, the relief in the form of deduction available against finance costs paid by landlords that let residential properties has been restricted to the basic rate of Income Tax, and it is being phased in from April 2017. Currently full finance costs incurred (whether mortgage interest, incidental costs such as arrangement fees, refinancing fees or legal costs) are allowed as a deduction from property income before taxable rental profits are worked out. The change means that all finance costs will no longer be allowable as an expense when calculating the taxable profits. The new measure will phase in the restrictions such that from 6 April 2020 landlords affected will no longer be able to deduct their finance costs from their property income. Instead they will receive a basic rate deduction from their income tax liability.  In other words for the tax year 2017-18 finance costs allowable will be restricted 75%, with 25% being available as a basic rate income tax deduction, for 2018-19 restricted to 50%, and 50% and for 2019-20 restricted to 25%, with 75%. From 06 April 2010 finance costs will be available as a tax relief limited to basic rate which is 20% of the costs incurred. Perhaps the unintended consequence of this measure is that a landlord with a large portfolio of buy-to-lets for example could be pushed in to the higher tax band since his taxable income will be high, deduction for finance costs no more being available.

Stamp duty land tax

Effective 06 April 2016 buyers of a second home or buy-to-let residential property will pay an extra 3% stamp duty land tax if the property bought was located in England, Wales, Scorland and Northern Island. This extra 3% applies even if you didn’t own a property in the UK (for e.g. you owned property abroad) or you buy it in your partner’s or child’s name who doesn’t own a property provided it costs £40,000 or more. The only exemption is this extract charge doesn’t apply where one is replacing his or her main residence.

Rent-a-room allowance

From 06 April 2016 the rent-a-room relief has been increased from $4,250 to £7,500. Basically, anyone who rents out a furnished room to a lodger where the rental income doesn’t exceed £7,500 won’t play pay tax on the income. One need not be a homeowner to take advantage of the allowance; even if one is renting one could lease out a room to a lodger, as long as the least terms allow you to do so. May be, after all the shockers in the form of stamp duty and finance cost relief, this is a measure aimed to tone down the impact!

Tax Partners

Source : Tax Partners
Business Info :
Tax Partners

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