The Summer Budget 2015 included some significant announcements affecting landlords of residential dwellings.  For income tax purposes these were:

  • an increase to the rent-a-room relief;
  • restricting the tax relief for finance costs; and
  • the introduction of a new relief to replace the 'wear and tear' allowance.

Rent-a-room relief

The flat rate of tax-free income that can be received from renting out a room or rooms in an individual's only or main residential property is to increase from £4,250 to £7,500 per annum from April 2016.

Interest relief and other finance costs

From April 2017, landlords liable to income tax will start to face a restriction on the effective tax relief they can claim on allowable finance costs. Instead of a straight deduction for such costs against rental income from residential properties, relief will be provided by way of a credit applied at the 'basic rate of income tax'.   The phasing of the restriction on total finance costs will be:

  • 25% of the total finance costs will be restricted in 2017/18;
  • 50% in 2018/19;
  • 75% in 2019/20;
  • 100% in 2020/21.

The implications of this go wider than intimated in the Budget speech.   In addition to the increased tax liability expected for higher rate (40%) and additional rate (45%) taxpayers, the disallowance of a deduction against profits may mean some individuals see their tax liabilities increase by more than the difference between their current marginal tax rate and the credit at 20%.  This is because the deduction for interest paid will no longer be applied as per the rental business accounts but instead relief given as a tax credit in the tax computation.

The difference in treatment will increase taxable income which could take people into higher rate tax bands and may affect the amount of tax on other sources of income.  It could also cause a loss of the personal allowance or trigger the high income child benefit charge.

Renewals basis

From April 2016, it is planned that landlords of residential dwellings will be able to claim a replacement furniture allowance instead of the historical wear and tear allowance.

Currently, landlords of furnished properties can deduct 10% of their rents receivable, less certain deductions, irrespective of their actual expenditure.  This has been a relatively generous and simple allowance for landlords of furnished lettings.

It would appear that this new relief will apply to furnished and unfurnished property, but not furnished holiday lettings, meaning that landlords may once again be able to claim relief for free standing items such as fridges.

Furnished holiday lets will continue unaffected and landlords remain able to claim capital allowances.

We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice. You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents. © Smith & Williamson Holdings Limited 2015