Landlords should seek advice about the tax changes ahead
With several tax changes for residential properties announced over the past 12 months, landlords need to be aware of how these could affect their tax bill.
Despite many within the property industry urging for a halt to the proposals, landlords must prepare for the changes being implemented.
Loan interest relief restriction
Currently, individual landlords can deduct loan interest from their profits which can significantly reduce their tax bill. The changes are complicated but to summarise they will broadly restrict the tax relief to basic rate tax, currently 20%. The changes will be gradually phased in from April 6, 2017, with the full restriction applying from April 6, 2020.
Cessation of the wear and tear allowance
Until April 5, 2016, landlords with furnished residential properties were allowed a fixed annual deduction against rental income to cover the cost of furnishings.
From April 6, 2016, this allowance ceased. Instead, relief is now given by a deduction for the actual cost of replacing furnishings. The initial cost will not be allowed.
Capital Gains Tax (CGT) payment date
From April 2019 onwards the CGT payment date will change. At present, CGT payable on the disposal of a residential property is due for payment by January 31 following the end of the tax year of disposal. The new proposals will require a payment on account to be made within 30 days of the completion of the disposal.
Although the full details of the proposal have not yet been published, we do know the changes should apply to the disposal of buy-to-let residential properties and second homes not covered by private residence relief.
Stamp Duty Land Tax (SDLT) rate changes for second homes
From April 1, 2016, higher rates of SDLT apply to the purchase of additional residential properties above £40,000, such as buy-to-let properties and second homes. The increased rate will be 3% above the current SDLT rates.
Rent a Room Relief
The above restrictions to reliefs and allowances is somewhat ameliorated by changes to rent a room relief. From April 6, 2016, homeowners renting out a room of their house have seen their tax allowance rise from £4,250 to £7,500.
Landlords should seek tax advice now on whether the new rules will affect their tax liability for 2016/17 onwards. If you currently claim a deduction for finance costs, or claim the wear and tear allowance, you are likely to see a change in your tax bill. Furthermore, if you are planning to buy or dispose of a residential property, we advise that you contact your accountant or tax advisor before proceeding, to understand the tax position.
For more information, Moira McKeown can be contacted at firstname.lastname@example.org.
Grant Thornton (NI) LLP specialises in audit, tax and advisory services