In his Summer Budget 2015, the Chancellor announced some major changes for the rental property market, in a bid to make the system fairer and have a dampening affect on a residential property market, that had caused some concern in recent years.
Firstly, he went on to reform the Rent a Room Relief which has been at the same rate since 1997. Rent a Room Relief is available if an individual rents out a room, or rooms, in their only or main residence. They are entitled to a Tax free amount of income from that room which is currently set at £4,250. The Summer Budget increased this amount to £7,500 per year with effect from 6 April 2016. It also increases the level if an individual rents out rooms in a guest house, Bed & Breakfast or something similar, provided that it is their main residence.
The Government’s objective here, is to increase an individual’s living standard and to also reduce and simplify the administrative and Tax burden the individual would have, if their income from rent-a-room was greater than £4,250. This announcement for people renting out is good news, particularly given the rising popularity of websites such as Airbnb, where people rent out rooms in their main residences for short periods of time.
Under current legislation, landlords are able to deduct 100% of the finance costs of their rental property, for example the mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan.
From April 2017 Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs.
This measure will restrict relief for finance costs on residential properties to the basic rate of income tax, so that landlords with higher incomes no longer receive the more generous tax treatment. As this is such a major change, the new rules will be introduced gradually from 6 April 2017, to give landlords time to adjust. The way in which landlords will obtain relief is as follows:
It is not going to be straightforward, especially not in the beginning. The relief will be a reduction in the Tax as opposed to a cost against the income as it is currently, which will take some getting used to.
The Chancellor also went on to reform the Wear and Tear Allowance.
Currently, landlords can claim an allowance of 10% of net rents to cover the costs of furniture, furnishings and fixtures. This is being replaced from April 2016 with a new relief, that allows all residential landlords to deduct only the actual costs of replacing furnishings. Capital allowances will continue to apply for landlords of furnished holiday lets.
A technical consultation will be published before the summer by the Government.
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