Continuing on our theme for the month about changes that will impact anyone that owns rental properties we wanted to give you more information about the changes in tax relief and the wear and tear allowance.
These changes could have an adverse impact on landlords especially those that have properties in areas where yields are low and have a smaller profit margin.
Tax relief changes
Currently, landlords can claim full tax relief on their mortgage interest payments. From April 2017 they will no longer be able to deduct their mortgage interest from rental income before calculating their tax. In simple terms, this means that their tax relief will reduce from 45% to a basic rate of 20% by 2020/21.
These changes in tax relief will impact all landlords that are higher rate taxpayers and those that have rental properties to generate additional income. It may also affect people that are currently basic rate taxpayers, as they will effectively be earning more income so they may mean they move into the higher tax bracket.
There will be a phased introduction to this change starting April 2017 through to 2020. In the fourth year, all landlords will receive tax relief at the basic rate.
There are ways in which you can counter these changes, and we are working with landlords to support them through these changes. For example, it may be worth considering forming a limited company structure; you will then be taxed at corporation tax rates, which are currently 20%.
Wear and tear allowance
To add to these changes wear and tear allowance is also being changed. Currently, landlords can deduct 10% of their rental income in calculating taxable profit to allow for wear and tear. This allowance is now being abolished, and landlords of residential property will only be able to deduct the actual costs incurred on replacing furnishings in the tax year.
If you own a rental property, and you want to find out more about how the changes to tax relief and the wear and tear allowance will affect you, please do give us a call on 01623 490 120 or email