It seems appropriate on the day of the Chancellor’s Autumn Statement that we should write on the subject of tax. The Government’s tax changes for landlords, which were announced in the summer Budget, could significantly impact on buy to let returns and it is important to be aware of these changes.
The changes are complex and we are NOT accountants, so professional advice should be sought, but below are some of our thoughts;
THESE ARE CHANGING:
Mortgage Interest: There are many costs that can be used to offset your income tax, with possibly the biggest being mortgage interest. You can currently use the interest you pay on your mortgage (not capital repayment) each year to offset your tax bill. Landlords can claim relief at their personal tax rate. However this is set to change; in a nutshell, landlords will no longer be able to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax.
Furniture: The rules here are changing. If the property is furnished, you can currently choose to claim back either a general “wear and tear” allowance or the exact cost of replacing individual items. The wear and tear allowance is 10pc of the rent annually, minus any costs you pay on behalf of the tenant such as council tax. You do not have to have spent any money replacing or repairing the furniture in a given year to claim this allowance. Alternatively you can claim the exact cost of replacing furniture in the property. This only applies to existing furniture – you cannot claim back the cost of furnishing it in the first place. But from April 2016, landlords will only be allowed to deduct costs that they actually incur. So if you don’t spend any money correcting wear and tear, you cannot claim.
Mortgage fees: Broker and arrangement fees are currently tax deductible and can be claimed back in the year you arranged a mortgage. However this is also likely to be restricted when the changes to mortgage interest relief come into effect.
THESE DO NOT SEEM TO BE CHANGING:
Letting agent fees: If you choose to employ an agent to manage your property, a reputable company like Osprey Lettings, for example, then these fees payable will remain deductable for tax purposes.
Buildings and contents insurance premiums: Can still be deducted from income.
Maintenance and repairs: Any money you spend keeping the property in a good state of repair is tax deductible. While you cannot claim for renovations, extensions or improvements that add value to the property, you can offset expenses to correct wear and tear. Property repairs can include mending broken windows and doors, repairing broken cookers, white goods, furniture or guttering, painting and decorating and replacing or fixing the roof.
Ground rent and service CHARGE: If you are a leaseholder, you will usually pay ground rent to the freeholder. Service charges are common in blocks of flats and can vary greatly. Basic charges cover cleaning, maintenance, heating and lighting for common areas, but other costs could include security or concierge staff. You can also claim back these against income for tax purposes.
Council tax and utility bills: If you pay any council tax or utility bills that a tenant would normally pay, you can claim the whole cost. You can also claim these costs during void periods, when there is no tenant living in the property.
Accountants Fees: As a landlord you must submit a self-assessment tax return each year. If an accountant prepares this for you the fees are tax deductible.
Others: Other direct costs of letting the property such as phone calls, stationery and the costs of travelling between different properties for the purposes of the rental business are also claimable expenses.
Whilst the changes to mortgage interest are a negative, in our opinion, they are not a surprise and it was always a possibility this relief would be withdrawn. Given the problems with affordability for first time buyers, it is of no surprise that the Government has tightened up reliefs available to buy-to-let investors.
What we do urge our clients at Osprey to do is to ensure they are checking and accounting for the relief’s that still exist. Ensure you always keep receipts and other proof of payments.
It is also important to bear in mind that the above will be phased in from 2017 and fully implemented by 2020; there is no rush, and also that for those without a mortgage, and those who own properties in a limited company the change in mortgage interest relief will not be relevant.
As always, we urge clients to seek professional advice. At Osprey we offer professional advice on letting and management of property, and can offer advice on residential property investment (based on our experience), however, for tax advice please consult your financial advisor.