The Chancellor clearly intends to derive more revenue from the let property sector and, as a result, many individual landlords will find themselves with increases in the level of taxable income from residential letting following the withdrawal of certain reliefs. This in turn will give rise to higher marginal tax rates.
David Chismon, a partner and member of the firm’s Landed Estates Group highlights the main changes below:
Additional 3% Stamp Duty Land Tax (SDLT)
With effect from 1 April this year an additional 3% SDLT charge has been applied to the purchase of all property valued above £40,000. This includes second homes and buy-to-let, so taking the maximum marginal rate to 15%.
The new rules are complex, and whether or not the surcharge is levied depends on the number of residential properties owned by the individual at the day of purchase. There are exemptions available if the property is to be used as an only or main residence. Timing is key, and there may be instances where the additional charge will have to be paid up-front with a refund at a later date.Finance cost and tax relief restrictions.
Relief on interest payments on dwelling-related loans is to be reduced and from 6 April 2017 tax relief that is available at the marginal (full) rate will be progressively reduced to basic rate only. The new restrictions will be phased over four years, meaning that individuals currently receiving full relief for finance costs will see a rise in taxable profits from their letting business that could result in substantially more tax being paid. In some instances, it may be worth transferring the business to a limited company where this restriction is not relevant, although careful advice is needed so as to not trigger unexpected tax liabilities.
Wear and tear allowance
This was abolished from 6 April 2016 for those who had previously claimed a 10% reduction, usually on gross rents received, on fully furnished properties. This has been replaced with a renewals system known as ‘replacement of domestic items relief’.
This could lead to additional tax charges for those renting out fully furnished property and it is important that individuals should keep all receipts for expenses incurred in replacing items.
Rent a room increases
And finally, some good news for those who let a room in their home. Previously, gross annual receipts of no more than £4,250 were exempt from income tax if derived from letting furnished accommodation in the landlord’s home while they continue to live there. The limit has now been increased to £7,500, offering additional tax savings to the landlord at their marginal rate.
Those receiving income below £4,250 might consider the possibility of increasing their rental charges to benefit from tax free income up to the new higher threshold.