For anyone who owns or lets out residential property, just round the corner are some significant property tax changes – both to the amount you pay and the tax relief you can claim. The most important developments are outlined in detail below.
The restriction of higher rate income tax relief
This measure will apply to anyone who:
- Lets residential property in the UK or elsewhere
- Is claiming a deduction for financing costs (e.g. mortgage interest or fees) from April 2017
- Pays income tax on their property income at the higher (40%) or additional (45%) rates
It will not apply to anyone who pays tax on their property income at the basic rate only, property businesses subject to corporation tax, or the financing costs for the purchase of furnished holiday let property.
The new measure will gradually restrict the tax relief landlords receive to the basic rate of 20%. From April 2020, landlords will no longer be able to deduct the cost of their mortgage interest from their rental income when calculating their taxable profit.
The changes will be phased in as follows:
- 2017-18: the deduction of allowable finance costs will be restricted to 75%, with 25% available as a basic rate income tax deduction.
- 2018-19: the deduction of allowable finance costs will be restricted to 50%, with 50% available as a basic rate income tax deduction.
- 2019-20: the deduction of allowable finance costs will be restricted to 25%, with 75% available as a basic rate income tax deduction.
Increase in Stamp Duty on additional property purchases
From April 2016 onwards, the stamp duty payable on additional property purchases will be 3% above the current rates.
The higher rate will apply if, at the end of the transaction, the individual owns two properties and the purchased property has not (yet) replaced the main residence.
If the additional property is intended to replace a main residence, but the original residence has not yet been sold, the higher rates will still apply but will be refunded if the sale takes place within 36 months.
Houseboats are exempt, as are caravans and mobile homes in certain situations.
The abolition of the wear-and-tear allowance
From April 2016, the wear-and-tear allowance (WTA) will be replaced by the replacement furniture relief (RFR).
At the moment, landlords of fully furnished property can claim an annual deduction based on 10% of their rental income to compensate them for the periodic replacement of furnishings. This deduction is given even if no replacements are actually made.
As WTA is based on rental income, landlords receiving higher rents receive an unfair advantage, as the amount of relief they can claim is inflated – even though expenditure will be broadly the same across the UK. It is therefore being abolished.
From April, under the RFR landlords can claim for the actual cost of replacing furnishings. Moveable furniture, televisions, carpets, curtains, fridges and crockery would all qualify for RFR. Baths, fitted units, boilers, washbasins and so on would not.
If you have any questions about the above property tax changes, please do get in touch. One of our expert advisers will be happy to talk through your options with you.