New Tax Rules for Landlords: Time for Forward Planning
Published on October 1, 2015 by Sarah Mac
The July budget seems to have brought a wave of concern for landlords, which is why it’s essential to take time to understand how the changes may affect you over the next few years, so that you can plan ahead and do what you can to maintain a positive yield.
No more fair wear and tear tax break
So let’s start with fair wear and tear, and the fact that the current system that allows landlords of furnished residential properties to deduct 10 per cent as a tax break will have disappeared by April 2016. From this point onwards, only costs incurred will be deductible.
It’s not clear at this point how this is going to work in practice, and we’ll be keeping an eye on reports so we can share the information once it’s available. However, we do know that there is some good news ahead as the Government is likely going to be reforming how landlords can account for the costs incurred in maintaining and enhancing rental properties.
Mortgage interest tax relief to be cut
Next up we have the cut on mortgage interest tax relief. The Chancellor George Osborne said he was keen to ‘level the playing field for homebuyers and investors’, so has reduced the rate of tax relief from the current 45 per cent to the basic rate of 20 per cent, starting from April 2017.
The fact that the change is going to be phased in gradually over four years from April 2017 should be seen as an advantage, allowing time to make adjustments without a sudden shock introduction.
Gráinne Gilmore, head of UK residential research at estate agents Knight Frank agreed saying, “This is a significant change in tax status for those with a rental portfolio, although the measured rate of introduction between 2017 and 2020 will help landlords plan their approach.
“Those planning to purchase a buy-to-let property will have to factor these new rules into their calculations, and this could affect the offers they are willing to make.
“If the relatively low yield environment seen today, especially in the South of England, is still evident when these changes start to come into force, there could be upward pressure on rents.”
Time for planning
It is clear that considerations will have to be taken on board when making offers on properties and setting rental rates, but considering the staged introduction of the mortgage interest tax relief and the few months’ notice on the fair wear and tear tax break, at least there is time for planning. Have a chat with your accountant and / or business advisers who will help you ready yourself in advance.