Tax Implications For Landlords for Furnished Property

Tax Implications For Landlords for Furnished Property

Steve Brown
2nd June 2016

From 6th April this year (2016), another big change came into effect and the ‘wear and tear’ allowance for furnished properties was taken away.

This essentially means that landlords won’t be allowed to claim 10% on their tax returns for any properties that are furnished.

The Government are trying to encourage landlords to invest more in their properties by raising the standards of the furnishings and the appliances in their property.

Although you will not be able to claim your 10% if you replaced or purchased a bed and mattress, the full purchase amount can be offset in your tax return.

However, as a landlord what you need to realise is that to get the same tax breaks you had been receiving before, you will now have to spend 10% of the rental income on replacement furniture and fittings.

So for example, if your rental income on your property for the year was £6,000, you would have to spend £600 on replacement furnishings and appliances to get the equivalent ‘wear and tear’ allowance.

Landlords need to consider how this will affect them and how they will use the tax change to plan for the future.

Hannah McCartan, MD of McCartan Lettings comments:

What Tax Specialists Deloitte Had To Say

It was announced today that allowable expenses from rental income will be restricted for landlords from April 2016.

The wear and tear allowance will be replaced by a new system from April 2016. The past wear and tear allowance allows landlords to deduct (broadly) 10% of their rental income in calculating taxable profit to allow for wear and tear. This allowance will be replaced by a system allowing landlords of residential property to deduct only the actual costs incurred on replacing furnishings in the tax year. Capital allowances for furnished holiday lets will not be affected. A technical consultation will be published later in the year to consider this further.

Further restrictions also include ‘all landlords of residential property in or outside the UK, are permitted to claim relief for finance costs (e.g. mortgage interest) incurred on their let property, giving tax relief at 40% and 45% for landlords paying tax at the higher and additional tax rates. This tax relief will be restricted to the basic rate of income tax only (20%). Implementation will be phased from April 2017 as follows:

  • 2017/18 – the deduction from property income will be restricted to 75% of finance costs with the remaining 25% available at the basic rate.
  • 2018/19 – 50% of finance costs available for full tax relief and the remaining 50% available at the basic rate.
  • 2019/20 – 25% of finance costs available for full tax relief and the remaining 75% available at the basic rate.
  • 2020/21 – all financing costs incurred by a landlord will be given as basic rate tax reduction.

 

Who Will Be Affected?

All landlords of furnished residential properties will be affected by the replacement of wear and tear allowance by a new system.

Landlords of residential properties paying tax at the higher and additional rates will be affected by the restriction of finance costs, excluding those with qualifying furnished holiday lets.

[Original Source]

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