Tees Valley based firm of chartered accountants and business advisers Waltons Clark Whitehill has laid out advice for landlords as they face the prospect of a double financial blow.
Proposed changes currently being considered would see an allowance for wear and tear to assets and furnishings abolished, while a tax relief on mortgage interest could be significantly reduced.
When calculating profits on a furnished letting, landlords are currently entitled to a deduction of around 10% of the rent received. This is to cover wear and tear on such items as carpets, curtains and beds. However, proposals currently subject to consultation would see this wiped out, meaning that from April 6, 2016, landlords may only be entitled to deduct the cost of replacing the initial asset.
Tax relief on mortgage interest paid relating to a let property – up to 45% depending upon the rate at which the landlord pays tax – is also subject to year-on-year reductions, until April 2020, when the maximum level of relief will be 20%.
George Hardey, Associate and Head of Tax at Hartlepool-based Waltons Clark Whitehill, said: “As the details have emerged, it has become clear that the Budget was not kind to landlords, who will feel the impact of these changes, especially if they pay tax at the higher rates, who will see their rate of relief on interest halved or more.
“There are, however, some actions landlords can consider to protect themselves and minimise the effects of the blows.
“Any landlords wanting to renew furniture in a let property will probably be wise to leave doing so until April 2016.
“In terms of the mortgage interest relief, those landlords who are higher tax payers but whose spouse or civil partner isn’t should consider the possibility of transferring the property to them.
“Additionally, those whose income fluctuates above and below the higher rate limit from year to year could benefit from speaking to their financial adviser to consider making pension contributions that would keep them below the threshold.
“Finally, for those who own and let multiple properties and perhaps pay tax at the highest rates, thought should be put into whether the lettings could be conducted more tax efficiently through a limited company. However, it is advisable to take professional advice on this route, to ensure the choice does not lead to other tax liabilities, such as Capital Gains Tax or Stamp Duty land Tax.
“It isn’t all bad news for some landlords, however, particularly for those who simply let a furnished room in their own home. The Rent-a-Room scheme, which allows them to earn up to an exemption of £4,250 per tax year, is proposed to be increased to £7,500 from April 2016.”