I’d like to draw the attention of our clients with buy to let properties to the new rules the government are proposing for claiming for fixtures and fittings in properties from April 2016 and the changes to Mortgage Interest Relief.
Whereas up until now, landlords have been able to claim mortgage relief as a normal expense, the same as they would from any expense they incur in running a business, the government is phasing in new rules so that in the future this will be capped at the basic rate of income tax (20%). For most small clients and landlords, this makes no difference as they will pay tax at 20% and aren’t in the upper rate (40%) tax band, but for any upper rate taxpayers this will limit the amount of mortgage relief they can claim to 20%. To explain further, whereas normally a 40% taxpayer would receive 40% relief on claiming for their mortgage interest, because they would be reducing taxable income by that amount and their taxable income would then be taxed at 40%, they will instead be entitled only to relief as if they were a basic rate taxpayer.
This will be phased in over the next five years:
“Under the withdrawal of interest relief, in 2017-18 landlords will only be able to apply the existing relief rules to 75% of their finance costs with the remaining 25% using the basic rate reduction. The following three years will see the proportion change to 50:50, and then 25:75, before the basic rate applies in full from 2020-21.”
The next big change is a change to Wear and Tear Allowance. From the tax year beginning April 2016 this is being scrapped. Up until then the rules have been that instead of being allowed to claim for replacing old furniture you were instead given a flat 10% relief on rent received every year. The new rules that HMRC were proposing but which have yet to be finalized are that you will be allowed to claim for the “renewal” of furniture. This means if you replace a £300 chair with another £300 chair you get to claim the full amount as tax deductible, but if you replace it with a £600 chair, you can only deduct up to the value of the original asset, i.e. £300 of the £600 you spent.
The cost of initially furnishing a property will not be deductible.
These rules are, ironically, virtually identical to rules that HMRC pushed the government to abolish in 2013.