Challenges ahead for buy to let: tax relief and maintenance costs
The recent changes to Buy to Let tax relief and maintenance costs won’t go unnoticed by landlords this year. If you currently own a Buy to Let (B2L) property, or are considering purchasing one in the near future, you’ll need to take these changes into account when calculating the feasibility of your rental.
Announced in the 2015 Budget, two changes are now in force for existing landlords. Firstly, the removal of the Wear & Tear allowance – this could potentially mean a rise in your repair costs. Secondly, the more significant change to B2L tax relief could go as far as making some B2L properties unviable.
Here, we take at look at what each change involves, if and how it affects you, and how best to cope with the challenges ahead.
1. Removal of the Wear & Tear allowance
As of April 6th 2016, B2L landlords of furnished or part-furnished residential properties can no longer deduct 10% of rental profits for the wear and tear of furnishings (sofas, TVs, beds and carpets etc). Instead, a new renewals system gives tax relief for replacements only.
Under the new scheme, any new furniture, furnishings, appliances and kitchenware that you provide for your tenants can be claimed for, providing you have evidence of your purchases (receipts). It’s also important to note that the scheme only covers the replacement of existing furnishings – the initial cost of furnishing your property cannot be claimed.
Holiday lettings are an exception from the new rules; the Wear & Tear allowance still applies.
How to cope
The new policy makes it more important to work out whether or not it’s cheaper/more efficient to replace furniture or to repair it. For most, this should be a relatively straightforward – small repairs are likely to be feasible, whereas it may be worth buying new furniture and claiming the tax relief if you’re forking out a lot for maintenance.
2. Restrictions on mortgage interest relief
More concerning for most are the changes to tax relief and profit calculations. From 2020, higher-rate (40%) and additional-rate (45%) tax payers will no longer be able to deduct all finance costs (interest and lender’s fees) from final profits – this means that your taxable profit will be higher.
Instead, all B2L owners will receive the same basic-rate deduction on finance costs – so higher-rate payers get 20% relief for interest paid rather than the 40% they’ve received until now. This means that higher earners will see their tax relief halved by 2020/21, and additional-rate payers will lose even more.
What about basic-rate taxpayers?
In theory, the new rules don’t affect basic-rate taxpayers – you’ll receive 20% relief for interest paid, just as you always have. However, if the new profit calculation tips your earnings (rental income + employment income) over the basic rate mark (currently £43,000) and into the higher-rate band, you’ll be taxed at 40%.
How to cope
There’s no need to panic just yet, as the change is being introduced over a four year period. By 2020, however, some landlords could see a significant drop in profits, particularly if you’re paying a high rate of interest.
To protect yourself against loss, there are several options you could look at, such as:
- Reducing your current interest rates by remortgaging your B2L
- Paying off your mortgage so you own your rental property outright
- Transferring your B2L to a spouse who is a basic-rate taxpayer
- Transferring your B2L to a Ltd company, making it exempt from the rules
Depending on your situation, the outcome of each option will vary. Most measures involve additional costs, so you’ll need to make some careful calculations before taking action.
At Maitland, we can help find the best option for you, based on your income, rental profits and personal circumstances. For advise on choosing the best way forward, speak to our team on 01825 748308.