Unexpected changes in tax relief for residential landlords

06 November 2017

There were substantial and in many cases unexpected changes in tax relief for residential landlords from April 2017. Tax relief on residential property finance costs, on mortgages, furnishing loans and overdrafts are being restricted to the basic rate of income tax, currently 20%. The restriction only applies to individuals, partnerships or trusts as is being phased in over 4 years from 6 April 2017. It applies to UK residents letting residential properties in the UK or overseas, non-UK residents letting properties in the UK and to trustees liable to income tax on property income. These rules do not apply to companies or to furnished holiday lettings.

The phasing in rules allow higher rate tax relief on 75% of rental income in 2017-18, 50% in 2018-19, 25% in 2019-20 and only basic rate relief in 2020-21. This could have a knock-on effect on recipients of child benefit by becoming liable to the High Income Child Benefit Charge.

These changes come on top of the withdrawal of the wear and tear allowance of 10% of rents, replaced by costs of replacement of furnishings, appliances and kitchenware. Stamp Duty Land Tax rates of up to 12% on the acquisition costs of the property, 15% for non-natural persons, companies, partnerships with a corporate partner and collective investment schemes, with relief for genuine property businesses.

There may also be the ATED (Annual Tax on Enveloped Dwellings) charge to consider, as well as capital gains tax on disposals.

Buy-to-let loans peaked at 30,000 in 2016 but have recently fallen to around 6,000 and demand is softening and the supply of lettings continues to decline and rent inflation has fallen to less than 1% per annum.

According to HSBC’s UK Housing Market Chartbook house price inflation has varied considerably, from 7.5% in the East Midlands to less than 3% in London. However the average house price in London is nearly £500,000 compared with the UK average of about £220,000. The Bank of England base rate of 0.5%, which recently doubled from 0.25%, will have an effect on mortgage costs. Not surprisingly some 85% of new mortgages are at fixed rates, with loan to value ratios also approaching 85%.

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