In the past, buy to let Landlords were allowed to set aside the cost of wear and tear against rental income before applying the appropriate income tax rate. This was broadly calculated at approximately 10% of the rental income. From April 2016 this allowance was 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.
Furthermore, at present, 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 the higher and additional tax rates where paid. From 2017/18, 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.
By far the more unpleasant change for high rate taxpayers will be the changes to tax relief on finance charges. Indeed, in some high value areas where loan to value is high, this change will have an extremely detrimental effect on net annual returns.