Own residential properties? Or thinking of doing so in the future?

6 recent tax changes you need to know about to avoid any costly pitfalls:

In a move to ‘level the playing field for homebuyers’, the changes introduced in 2015 summer budget were clearly biased against residential buy-to-let landlords, pushing people towards other types of financial investments.

The changes not only impact the way properties are purchased, but also how rental income is calculated and the deductions you can now claim.

1. Gradual restriction of finance costs (for higher rate individuals)

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 (20%) reduction from their income tax liability for any finance costs incurred.

The restriction will come into play from 5 April 2017 and will be phased in over 4 years, restricting the finance cost by 25% each year until April 2020. Renovate Me give a good worked example.

As such, any mortgaged properties with high finance costs will no longer be as tax efficient as they were previously and landlords could now be faced with significantly higher tax bills and reduced returns than in past years.

2. Increased stamp duty

From April 2016, an individual purchasing either a buy-to-let property or their second home will have to pay an additional 3% stamp duty.  See further guidance from Which here.

The rules around these changes are extremely complex (with very little HMRC guidance) especially when properties are jointly owned or were once your main residence.  However, there are certain reliefs available for replacing an individual’s main residence that should be reviewed before paying over any stamp duty on a property purchase.

3. Abolition of the wear and tear allowance

In the past, landlords of fully furnished properties could claim an annual deduction based on 10% of their annual rental income, to compensate them for the periodic replacement of furnishings.  However from April 2016, this relief has now been removed and substituted with the replacement furniture relief discussed further below.

4. Introduction of replacement furniture relief (RFR)

From April 2016, landlords of fully or partly unfurnished residential properties can claim for the actual cost of replacing furnishings such as fridges, freezers, carpets, beds etc. More permanent fixtures that are part of the property such as baths, toilets, and kitchen units would not qualify.

The new relief however, only applies to replacement costs and any initial cost of furnishing a property would not be included.

In addition, any improvement cost would also be excluded, e.g. if a washing machine was replaced by a washer/dryer, only the replacement cost of a similar washing machine would be allowed.

5. Reduction in capital gains tax (but not for residential properties)

Whereas all other investments now attract a lower rate of capital gains tax upon disposal, falling from 28% (higher rate) to 20% from April 2016; the rate remains unchanged for residential property investments, making other types of investments much more attractive from a capital gains perspective.

6. Increase in the rent-a-room allowance

This measure will only impact those receiving rental income from letting out a room or rooms in their only or main residence. From April 2016, the level of tax-free rental income an individual (or couple) can receive has increased from £4,250 to £7,500 per tax year.

It’s clear that the buy-to-let landscape is changing and if you believe that you may be affected by any of the above issues then please get in contact with one of the Inspire team.

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