Changes to UK Taxation of Residential Letting Landlords

There are three changes in the UK Summer Budget of 8 July 2015 which affect investors in UK residential property.  This is Garbutt + Elliott’s summary.

Tax Relief on Mortgage Interest

Taxpayers with a UK tax liability into the 40% rate band, will find their tax relief on loans used to buy a residential letting property in the UK is restricted from April 2017 onwards.  Between April 2017 and April 2020 the rate of relief on loan interest for 40% taxpayers will gradually be reduced each year to the basic rate of tax, 20%.  For owners with large mortgage liabilities and currently paying tax at 40%, this could have a large impact on their tax position, meaning they should review the effect on their future cash flow.  The rationale is that the government is trying to redress the favouritism showed by the tax system towards investors rather than owner-occupiers….and raise tax of course.

Abolition of Wear and Tear Allowance

Some owners currently claim tax relief on replacing furnishings, kitchen equipment etc. through the 10% “Wear and Tear allowance” if their residential property is let “fully furnished”. This works through an annual deduction of 10% from rents to cover the cost of such items, rather than claiming the actual cost. However, the Wear and Tear allowance is being abolished on 6 April 2016 and replaced with a revised “renewals” basis that will give relief when those items are replaced.

Owners currently using the 10% Wear and Tear allowance should be aware of the change when estimating their future tax liabilities.  It may also be worth them delaying replacing relevant furnishings until April 2016 to maximise overall relief, as they can claim the actual cost of replacement after that date.  The change is likely to be beneficial for owners using the current renewals (rather than Wear and Tear) basis of relief as the HMRC proposals mean that more items will qualify for relief from April 2016.

Non-Domiciled UK Residential Property Investors

Some non-UK domiciled individuals use a non-UK company to own their UK residential property lets. This can have advantages for UK Inheritance Tax planning. However, the government has proposed that from April 2017 this advantage for Inheritance Tax planning will be removed, and where a non-UK company has residential properties, then these will become subject to UK Inheritance Tax on the death of the owner.  The change however does not apply for example, to commercial properties.  Full details are yet to be published, and this may not be until 2016.

We will be contacting our clients over the coming weeks to discuss how the changes may affect them.

If you would like any further information on this subject, please contact Rob Durrant-Walker or enquiry@garbutt-elliott.co.uk – 01904 464100