5 Minute Guide to Landlord Allowances

Sunday Times Money Section 7th February 2016

Landlords who own rental properties that need new sofas or fresh curtains should resist buying anything for a couple of months because important tax changes take effect in April.

What’s the deal?

A “wear and tear” allowance is currently available to landlords who let furnished residential properties. This is fixed at 10% of the total rental income, less expenses that would usually be borne by the tenant, such as council tax and utility bills. It is designed to cover the cost of replacing furniture and furnishings over time. Unusually, it is available regardless of whether any money has been spent on replacements during the tax year.

The allowance covers moveable furniture and furnishings, such as beds, sofas and chairs, as well as televisions, fridges and freezers, crockery, carpets and curtains. It does not apply to fixtures that would not usually be removed if the property were vacated or sold, such as bathtubs.  Soon, however, landlords will be able to claim only for the amount they have actually spent on replacing furniture. The new rules will apply from April 1 for corporation tax purposes and April 6 for income tax.

So why should I delay?

If you have items that need replacing, you can save money by buying them after April 6. For the current 2015-16 tax year you could claim the full 10% wear-and-tear allowance and then, under the new system, claim a deduction for the actual cost of replacement in 2016-17.  Imagine the rent on a house you let is £1,000 a month. You plan to replace a wardrobe, an armchair and some blinds soon, and expect the cost to be £750. If you replaced the items before April 6, you could claim the wear-and-tear entitlement of £1,200 (10% of the rental income of £12,000) for 2015-16.

However, if you delayed until mid-April, you could still claim the £1,200; then, in the next tax year, you would be entitled to a deduction of £750 for the actual cost of replacements.

Lucy Brennan, of the accountancy firm Saffery Champness, said: “Overall, the measure is touted as a fairer way of calculating taxable profits and will see many landlords waiting until April to replace items. Unless the current items pose a health and safety risk, you may wish to do the same.”

Anything else landlords should be aware of?

In recent months George Osborne has changed the rules for landlords – and few of them will thank him for it. From April, anyone buying a second home or buy-to-let property will have to pay a surcharge of three percentage points above the normal rate of stamp duty. The earnings of thousands of buy-to-let landlords will also be hit when the rules on mortgage interest tax relief are changed from next year. At present, landlords can claim relief on monthly interest repayments at their income tax rate – so up to 45% . However, this will be restricted to 20% for all landlords by April 2020.

Top Tip

The changes to the wear-and-tear allowance and the capping of tax relief for mortgage repayments apply only to buy-to-let properties – Furnished holiday lets are exempt. Under the furnished holiday letting rules, all expenses, including full mortgage interest, can be offset against the rental income. For example, on a cottage bought for £400,000 with a 75% mortgage fixed for two years at 2.5%, a landlord in the 40% tax bracket could currently claim £3,000 in tax relief. From 2020 the relief will be capped at £1,500 for a buy-to-let landlord, but not for a holiday let.The rules are complex about what does and does not qualify as a furnished holiday home, so it might be worth seeking expert advice.

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