New Rules For Buy-To Let Landlords - August 2016!

The 2016 Finance Bill sees the introduction of important tax changes for property investors that were originally announced in the 2015 Budget.

From 6 April 2016 onwards, there are important tax changes affecting the replacement of furnishings for buy to let landlords. 6 April 2017 will see the start of mortgage interest being restricted to basic rate only.

Wear and tear allowance abolished

Until 5 April 2016 landlords who were letting residential property on a fully furnished basis were able to claim a 10% "wear and tear” allowance towards the cost of the depreciation of furnishings. This simple allowance was an alternative to claiming a deduction for the actual cost of replacing furnishings which was a concession that applied up until April 2013.

So for example, where the gross annual rent was £9,000 there would have been an allowable deduction of £900.

This change seems to be inconsistent with the government's stated desire to simplify the tax system.

The new relief for replacement of furnishings in property businesses

Up until April 2013 it used to be the case that where furnishings were replaced in a property rental business there was deduction for the cost of the replacement items in arriving at rental profits.

This was never a statutory deduction and was accepted by HM Revenue and Customs on a concessionary basis. That concession was controversially withdrawn at relatively short notice in 2013 so for a three year period, unless landlords were eligible for the "wear And tear" allowance there was no relief for furnishings.

As the result of extensive lobbying by the accounting profession, and the residential landlords association, the relief has been restored on a statutory basis from 6 April 2016 by the latest Finance Bill.

The new relief provides a deduction for the actual cost of replacing furniture, furnishings, appliances and kitchenware for the use of the tenant in the let property.

Note that there is no allowable deduction for the initial fitting out of the rental property, just the cost of replacement Items. Furthermore the allowable tax deduction applies on a like for like basis so if there is any significant Improvement then the tax relief will be restricted. So, for example, where a washing machine is replaced with a washer/dryer costing £600, tax relief would only be available for the cost of the equivalent washing machine costing say £400.

No renewals relief for other businesses

Although the renewals basis has been reintroduced for rental businesses from April 2016, it has been withdrawn for other trading business. This relief was previously referred to as the "loose tools" deduction.

Consequently there is no longer relief for the replacement or alteration tooling. In future HMRC would expect such expenditure to be dealt with through the capital allowances rules, most likely by making a short life asset claim.

No change for Furnished Holiday Lettings

The above changes to the renewals basis do not apply where the property rental business falls within the definition of a qualifying furnished holiday lettings (FHL) business.

Such businesses continue to qualify for capital allowances when plant and machinery used In the course of that business is acquired and would benefit from the100% write off under the Annual Investment Allowance rules.

There are strict conditions for the property business to qualify as FHL, the most important condition being that the property is let for at least 105 days (15 weeks) in the tax year, and comprises a series of short term lets.

Note that under the capital allowances rules, relief is not just available for replacing assets but also for the initial furnishing of the holiday property.

Interest relief restriction starts 6 April 2017

As previously announced the current deduction available for mortgage interest and other finance costs starts to be phased out from 6 April 2017.  In 2017/18 only 75% of finance costs will be deductible in arriving at rental profits, the remaining 25% will only qualify for basic rate tax relief.

In 2020/21 there will be no deduction against rental profits for finance costs, just a basic rate tax reduction. This will not only affect higher rate taxpayers but will also have the effect of pushing some landlords into higher rates of tax.

Currently where a buy to let landlord has £10,000 a year net rental profits after deducting £30,000 mortgage interest, in  2020/21 his rental profits would increase to £40,000.

If his other income is £25,000 a year, the rents would currently be taxed at basic rate 20%. Assuming his other income stays the same, his taxable income would increase to £65,000 with a significant portion being taxed at the 40% higher rate. The £30,000 mortgage interest would only qualify for a £6,000 (20%) set off against the 2020/21 tax liability.

Note again that the restrictions do not apply to any part of the amount borrowed for the commercial letting of furnished holiday accommodation. Furthermore, the restriction does not apply to loans for property development trades, or loans secured on a let dwelling house which are applied for the purposes of a trade.

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Restriction Of Buy To Let Interest

In the Summer Budget it was announced that mortgage interest relief for buy to let landlords would start being phased out from 2017/18 onwards and restricted to basic rate only from 2020/21.

Now that the Finance Bill has been published the full impact of this change is starting to emerge and for some landlords this will result in a significant increase in the tax payable as their rental profits will now be taxed at higher rates. This is because mortgage interest will no longer be an allowable deduction in arriving at rental profits.

For example a landlord with £60,000 of gross rental income, £6,000 of agent’s commission, £8,000 of repairs and other expenses and £40,000 of interest would currently have £6,000 of net rental profits.

However, from 2017/18 the interest relief will start being restricted, and from 2020/21 there will be no deduction for interest, which would mean that, assuming the rent and expenses remain the same, the taxable rental income would be £46,000.

For many landlords this will mean that the rent will fall into the higher rate tax bands and the £40,000 interest will result in a £8,000 basic rate tax reducer to set against the tax liability.



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Mortgage Market Review 2014

Significant changes have come into effect as a result of the Mortgage Market Review (MMR).  Tougher mortgage rules mean that lenders will have to carry out detailed checks on a borrower’s spending and stress-test ability to pay if interest rates go up. 

The changes came into force from 26th April 2014 and for borrowers mean that they will have to account for all outgoings.  They will face additional questions focused on imminent changes to their lives which will need to be backed up with evidence.

FCA Mortgage Market Review 2014

The regulator behind the new rules, the Financial Conduct Authority (FCA), said they would "hardwire common sense into the mortgage market", and prevent a return to irresponsible lending that took place in the run-up to the credit crisis.

APJ Accountancy comments:

“Some lenders adopted the rules earlier this month, but the changes will mean that anyone who applied for an agreement in principle on a loan several weeks ago, or who has applied for a mortgage and wants to make a material change - perhaps borrowing more – will have to start the application process from scratch.”

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We are a team of Chartered Certified Accountant regulated and monitored by The Association of Chartered Certified Accountants (ACCA).

Confirmation of Income for Mortgage Purposes

Many mortgage lenders are now requesting a copy of the official HMRC tax calculation (SA302) as confirmation of income for mortgage applicants; Previously, they would have accepted income confirmation by the borrower’s accountant. There is thus a conflict between planning to minimise income for tax purposes and declaring a higher level of income to support a mortgage application.

A further problem is that the SA302 HMRC calculation cannot be downloaded from the HMRC website when third party software has been used to submit tax returns, and copies are not routinely sent out by HMRC. To obtain a SA302 calculation you are required to phone HMRC and ask for the form to be sent out by post. This usually takes about 14 days.

Income for Mortgage Purposes

The accountancy bodies are calling for HMRC to allow accountants to download and print off the SA302 for their clients to support their mortgage applications.

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