Following the restriction of tax relief for mortgage interest and the 3% increase in Stamp Duty Land Tax all is not doom and gloom for buy to let landlords. Following on from the consultation this summer the draft Finance Bill 2016 includes the legislation to reintroduce tax relief for the replacement of furnishings in buy to let properties from 6 April 2016.
This will apply to both furnished and unfurnished lettings and will mean that the cost of replacing items such as cookers and washing machines will again qualify for relief following the withdrawal of a concession from 6 April 2013.
Note that the alternative, and simpler, 10% wear and tear allowance will be withdrawn from 6 April 2016 for those letting properties fully furnished.
Those letting properties under the more stringent furnished holiday letting rules will continue to be able to claim the Annual Investment Allowance which provides 100% tax relief for the initial furnishing as well as renewal of furniture in holiday properties.
The Chancellor announced that the amount of income tax relief landlords can get on residential property finance costs (such as mortgage interest) will be restricted to the basic rate of tax.
To give landlords time to adjust, the change will be phased in gradually over 4 years:
2017/18 – the deduction will be restricted to 75% of finance costs, with 25% being available as a basic rate tax reduction.
2018/19 – 50% finance costs deduction and 50% given as a basic rate tax reduction
2019/20 – 25% finance costs deduction and 75% given as a basic rate tax reduction
From 2020/21 – all financing costs incurred by a landlord will be given as a basic rate tax reduction.
Class 2 NICs are payable by the self-employed at the rate of £2.75 per week, although there is a small earnings exemption for those earning up to £5,885. It is understood that HMRC believe Class 2 NICs also apply to buy-to-let landlords. This is not correct and was tested in a case before the Tax Commissioners back in 2002 (Rashid v Garcia), when it was determined that property income was not applicable for Class 2 NIC purposes. Please get in touch with us if you receive a demand from HMRC for Class 2 NICs or a questionnaire requesting details of your property rental activities.