Submitted by Sestini & Co
| on Tue, 07/14/2015 - 7:11 | In Uncategorized
A number of people have asked me to clarify the changes to the taxation of rental income since the budget announcements last week. I wasn’t at all surprised at the questions as the measures announced are at best at odds with the stated aims of the budget and at worse contrary to some of the basic tenets of the UK system of taxation.
In brief, the key changes impacting landlords were as follows:
1) relief for mortgage interest payments will be restricted to the basic rate of income tax: so in basic terms a 40% taxpayer will receive relief for half of his mortgage interest payments against his rental income. This restriction will be phased in over 4 years from April 2017 (more work for the Office of Tax Simplification, methinks? Luckily the OTS is now a permanent fixture);
2) the 10% wear and tear allowance for furnished properties – which allows a notional deduction of 10% of gross rents to compensate for the cost of repairs and replacement of furnishings and other moveable items in the property – will be no more. Instead, from April 2016 landlords will be able to deduct “actual costs incurred in improving the property”;
3) rent-a-room relief, which if memory serves correctly was introduced in the 1990’s at or close to its current level, will increase from £4,250 per annum to £7,500 per annum from April 2016. This is a relief designed for people who rent out a room in their main house and enables a flat rate deduction to be claimed against the rental income rather than having to apportion costs of mortgage interest, utilities, insurance, etc.
4) the 10% wear and tear allowance for furnished properties – which allows a notional deduction of 10% of gross rents to compensate for the cost of repairs and replacement of furnishings and other moveable items in the property – will be no more. Instead, from April 2016 landlords will be able to deduct “actual costs incurred in improving the property”;
There were also changes announced relating to levels of rent for social housing however it is unlear at this stage how these will affect the many private landlords accommodating housing benefit tenants.
The given reason for measures (1) and (2) is that the current system “supports landlords over and above ordinary homeowners” and attempts to redress this perceived unfairness.
This seems to me to go against basic principles of tax and accounting that where an enterprise is undertaken with a profit motive, then expenses reasonably, wholly and necessarily incurred in making that profit should be deductible against those profits. In the sense that it is an undertaking with a view to making a profit, renting out a property is surely more closely aligned with running a trade or business than owning a personal residence and so these new rules, whilst ostensibly rectifying a perceived injustice, simply create other disparities. Why, for example, should residential property be singled out compared to commercial property? Why should running a letting business as an individual be disadvantageous compared to owing a property portfolio as a company?
The commentary on the second measure is equally interesting: it refers to landlords “improving the property”. This is curious given that the wear and tear allowance was never connected with property improvement, only the contents of the property (otherwise why restrict it to furnished lettings?) There have been several changes in recent years to the way in which landlords have been able to deduct expenses incurred on their properties, which have been passed into legislation rather quietly and don’t leave much in the way of “actual costs” which can still be deducted. I’m looking forward to the final legislation to see whether the removal of the wear and tear allowance has provided a mechanism to quietly restore some of these lost reliefs.
The third measure, whilst welcome, appears to set up another disparity, between those with sufficient space to rent out a room in their main home and (for example) those who become accidental landlords. There appear to be no plans to restrict this relief to the basic rate of income tax for higher rate taxpayers, so a 45% taxpayer taking in a lodger can benefit fully from the £7,500 deduction whereas someone renting out a modest house because they are unable to sell their former home might only receive restricted relief on their mortgage interest, even if having to incur rental costs or duplicate mortgage costs themselves elsewhere.
More on this later as the consultations, drafts and commentaries become available. In the meantime, if you have any questions or comments please don’t hesitate to contact us on 01761 241 861 or at firstname.lastname@example.org 🙂 I would love to hear your thoughts on this.