Unwelcome tax changes for landlords already in place

There were a number of changes to the taxation of rental property announced in the Budget, all of which came into effect from 6th April with the exception of the reducing of tax relief on mortgage interest which is being phased in gradually over the next four years. The combined impact of these changes is likely to significantly increase the tax burden for many landlords. A number of commentators have suggested that this may lead to those with a small number of rental properties deciding to sell up and leave the rental sector. This would appear to be the Government’s aim as part of it’s wider strategy to try to dampen the buy to let property market and encourage first time buyers. The changes are summarised below –

Wear and tear allowance

Previously landlords could claim a flat rate allowance of 10% of gross rents to reflect the cost of replacing furniture (tables,chairs. sofa’s, beds)  and fittings (curtains, carpets). From 6th April this is abolished and replaced with the actual cost of any replacements, which in most cases is likely to be a lot lower.

Stamp Duty

An extra 3% stamp duty will be charged on the purchase price of second homes bought either personally or through a company after 6th April. This does not apply to commercial property.

Interest on mortgages

Relief on interest will be restricted to basis rate (20%) and is being gradually phased in over 4 years starting from 6th April 2017 as follows –

Finance cost allowed in full                    Finance cost allowed at basic rate

Year to 5 April 2016          100%                                                            0%
Year to 5 April 2017          100%                                                            0%
Year to 5 April 2018          75%                                                            25%
Year to 5 April 2019          50%                                                            50%
Year to 5 April 2020          25%                                                            75%
Year to 5 April 2021          0%                                                            100%

Capital Gains

Capital gain rates for individuals reduced by 8% from 6th April 16 but this does not include residential property, so the new rates are now –

Basic Rate             Higher or Additional
Taxpayer                    Rate Taxpayer

Rate on gains from residential property     18%                                 28%
Rate on gains from other assets                   10%                                  20%