In light of the Chancellor’s latest move to squeeze more tax from landlords, by limiting tax relief on allowable expenses, we outline your options.
If you are not aware, from April 2017 mortgage interest relief will gradually be restricted to the basic rate of tax. A landlord getting tax relief at the higher-rates (45% and 40%) will only be able to claim relief against letting profits at the basic 20% rate.
From 2016 ‘Wear and Tear’ allowance will be restricted, and you will only be able to claim tax relief on the cost of actually replacing furniture. Currently you can offset 10% of your rental income against profits as a notional allowance for replacing furniture and redecorating.
One piece of positive news is that corporation tax is set to be reduced to 18% by 2020.
These tax changes will have a significant impact on buy-to-let landlords with large portfolios. In this article we highlight ways for you to minimise the impact these changes will have on your business.
Wear and Tear
From April 2016 landlords will only be allowed to deduct the costs they actually incur for replacing furnishings in their rental properties.
All landlords will be eligible for the relief; the relief applies to all rented properties no matter the level of furnishing.
The relief will only cover replacing existing furnishings – landlords cannot claim for the initial purchase of furnishings (i.e. when they buy a new property and furnish it for the first time). This is because the initial readying of a property for tenancies qualifies as capital expenditure, which is never claimable.
With the current 10% allowance, the higher the rent, the larger the tax relief. A £5,000pcm rental income allows £500 of allowance, and £1,000pcm leaves only £100 claimable allowance. This creates a divide between landlords based on their geography.
The new relief allows landlords to claim their actual expenses, not a percentage of rent. The objective is a level playing field across the UK.
Should you furnish your property?
Most landlords, especially those starting out or with small portfolios, prefer unfurnished properties – or will provide heavy goods and white goods (bed, wardrobe, fridge, washing machine).
The decision on whether to furnish your property should be a financial one. Will furnishing your property now save you money in the long run? Do tenants in your area prefer unfurnished accommodation? Have you got the money set aside to furnish your property?
This is question that can only be answered on a portfolio by portfolio basis, so take this as an opportunity to calculate the risk/reward of furnishing your portfolio in light of these relief changes.
Student accommodation is typically difficult to maintain and harder to manage, and this is reflected in higher rents. This is good news if you let your portfolio to students – you may benefit under the new rules by fully furnishing your property as the costs you incur annually will probably exceed your current allowance of 10%.
Incorporating your Buy-to-Let Business
Some larger portfolio landlords find it beneficial to transfer the ownership of their buy-to-let portfolio into a Limited Company, as tax savings can be achieved. Companies will benefit from the reduction in Corporation Tax and the savings may offset the cost of setting up and running a company – including the cost of filing audited accounts with Companies House.
It is therefore highly recommended when considering restructuring your buy-to-let property business that professional tax advice is obtained to ensure that maximum tax efficiency is achieved – see our recommendation at the end of this article.
The effect on you will depend on the current marginal rate of tax you pay. If you fall within the current 20% band, as we expect any typical retiree landlord to, you may be unaffected, and therefore keep your focus on capital gains and consider setting up an inheritance trust fund for your family.
These changes might force the hands of landlords nationwide to keep rents moving up, even if the tenants are longstanding. It’s never been good practice to allow tenancies to “roll-on” month to month as the tenant can give notice at an inopportune time (e.g. November) and it’s often the case that no annual review of the rent is undertaken in these cases. Subsequently, the rent can fall quite some way behind market rate over time.
Is buy-to-let still viable?
Yes, despite the pundits in the financial press ringing the death knell for the sector the fundamentals are still all present – the desirability of the UK as a place to live, continued high levels of net inward migration, the rate of smaller household formation driven by divorce and lengthening life expectancy, and the unaffordability of owning your own home for many young and not so young people.
We commissioned a set of regional market intelligence reports this spring. In them we indicate that many of our UK regions have higher yields than a typical pension annuity, and these yields were calculated without gearing in mind. Therefore we recommend downloading any relevant marketing reports to get the most from your investment plans. You can find the reports on our Ask Martin microsite by clicking here
As a landlord, should you require any general or lettings-based tax advice, or you would like to obtain further details of the introductions made to the summer 2015 budget, then please feel free to contact the tax team Crossley Group Chartered Accountants and Tax Advisors using the following contact details.Email: firstname.lastname@example.orgTelephone 01634 840440