From April 2017 the tax relief for private residential landlords will be changing. There are many small, private landlords for whom these changes will be relevant. As we have reported in earlier newsletters, over the last 15 years, a large number of private individuals have invested their money in rental properties as an alternative to investing in a pension scheme.
It is important for these individuals to ensure that they make the correct declarations on their tax returns and that their investment continues to be profitable.
The current rules permit residential landlords to deduct 'allowable expenses' from any gross rental income in order to calculate the taxable profits. Allowable expenses are items that landlords need to spend money on 'wholly and exclusively' for the purposes of renting out the property. Examples are: letting agent fees and utility bills. However, allowable expenses do not include 'capital expenditure', for example mortgage capital repayments or renovating or improving a property beyond repairs for wear and tear.
Under the new rules, finance costs will not be taken into account to calculate the gross rental income that is taxable. Instead, once the income tax on rental profits and any other income sources has been assessed, the landlord's income tax liability will be reduced by a basic rate 'tax deduction'. For most landlords, this will be the basic rate value of the finance costs.
This will affect you if you are:
- A UK resident individual that lets residential properties in the UK or overseas
- A non-UK resident individual that lets residential properties in the UK
- An individual who lets such properties in partnership
- A trustee or beneficiary of trusts liable for Income Tax on the property profits
All residential landlords with finance costs will be affected, but only some will pay more tax.
The rules will be phased in from 6 April 2017 and will be fully in place from 6 April 2020. This means that the full impact of the rules will not be felt immediately. During the transitional period, landlords will still be able to deduct some finance costs when working out taxable property profits.
These changes are likely to impact adversely on many small, private landlords. This may mean that the landlord makes less money than they anticipated. It is important to be sure how these changes will apply to you now. You may need to consider increasing the rent to cover some of the losses.
Link: https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies
To discuss this or any landlord related issue, contact us.