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Wear & Tear Allowance rule change – Are you working out your property Landlord Tax properly?

Date posted: March 27, 2017


Property Landlords would be forgiven for thinking that HMRC have a personal vendetta against them of late. Firstly with the restriction of loan interest followed by the stamp duty hike and then the higher rates of capital gains tax.

In April 2016 another shot was taken at Landlords with the rules changing from ‘Wear & Tear’ to the new ‘replacement relief’. This, generally, is going to hit landlords in the pocket again.

Wear & Tear

Under the old rules (pre 6 April 2016) where a landlord rented out a property furnished they were automatically allowed a deduction of 10% of their total income as an expense to cover wear and replacement of furnishings. In most cases the 10% exceeded claims lost for actual cost and over a number of years would almost always benefit the landlord.

HMRC have now deemed that this relief is too generous and have withdrawn it to make way for the new ‘replacement relief’.

Replacement relief

Under the new rules you are allowed to claim relief only when replacing furnishings, furniture and household appliances (except integrated ones) on a like-for-like basis. The claim is also allowable when replacing an old, worn down furnishing for the modern equivalent.

Any purchase of new or improved furnishings will not be allowable for any tax relief at all.

Two conclusions to note

  1. When buying a new property, if it was empty and you had to equip it from scratch you would not be able to claim a penny for purchasing the furnishings but if the property had old, worn down furnishings then paying to replace them would get full relief.
  2. It is now important to keep full receipts and details of furnishings etc. replaced and ideally photos to show that the replacements are like-for-like.

If you are a property landlord and want more information of any of the topics mentioned here or any other matter please contact our Property Tax Specialist on 01422 341019 or tim@rileyandco.co.uk

Dividend Templates 2017

Date posted: March 20, 2017

To help you with completing your dividend paperwork, the templates for the minutes and tax voucher are below. A link to our January blog  provides you with details on how to pay yourself a dividend.

Dividend Minutes Template

Tax Voucher template

Please do not hesitate to contact us should you need any help.

https://www.rileyandco.co.uk/2017/01/16/help-pay-dividend/

Do you have property income? Are you a higher rate tax payer?

Date posted: March 16, 2017


If the answer to both of these questions are YES then it is possible that new law changes will mean
you may pay 144% Tax!

If you currently are a higher rate tax payer and have a mortgage or loan of any kind which you claim against rental income then this change will increase the tax you pay on rental income.

From April 2017 interest on all loans will be restricted each year so that by 2020 interest will no longer be an allowable expense against the profits of renting but instead as a 20% tax relief against your income after it has been assessed to tax.

This can have more of an effect than just halving the rate of relief for higher rate tax payers.

This restriction applies to partnerships too but not furnished holiday lets, limited companies or letting of commercial properties

The relief will be phased in as follows:

2017/18 2018/19 2019/20 2020/21
% of interest as expense 75% 50% 25% 0%
% of interest as tax relief 25% 50% 75% 100%

People who are affected by these changes and no longer feel that they can carry on renting under the new restrictions have the following alternative choices:

  • Incorporation
  • Split rental income with a spouse
  • Pay down borrowings on residential properties
  • Switch to commercial properties
  • Sell up

If you are affected by these changes and want to talk to our chartered tax adviser please contact us on info@rileyandco.co.uk or 01422 341019.

Please see some examples of the effect of this restriction here:

Buy-To-Let Interest Restriction

Example 1:

Billy is a 49 years old teacher. He is a 40% tax payer and has decided to purchase a residential property as an investment and rent it out. He doesn’t need to borrow much to buy the property so his mortgage is quite low. Here is the effect:

2016/17 2020/21
Gross rents 7,200 7,200
Repairs etc. 1,000 1,000
Interest on mortgage 2,500
Net rental profit 3,700 6,200
Taxed at 40% 1,480 2,480
Less interest relief at 20% 500
Net liability on rental income £1,480 £1,980
Tax increase £500
Effective rate on ‘real’ profit 40% 53.5%

Buy-To-Let Interest restriction

Example 2:

Mick and Alana are married and together run a large portfolio of residential properties. They have never run these through a limited company:

2016/17 2020/21
Gross rents 600,000 600,000
Repairs etc. 200,000 200,000
Interest on mortgage 350,000
Net rental profit 50,000 400,000
Personal allowance (x2) 22,000
Taxable income 28,000 400,000
Taxed at 20% (x2) 5,600 17,200
Taxed at 40% 85,600
Taxed at 45% 45,000
Total tax 5,600 147,800
Less interest relief at 20% 70,000
Net liability on rental income £5,600 £77,800
Tax increase £72,200
Effective rate on ‘real’ profit 11.2% 144.4%