Property Income Changes from 2016

Many changes were brought in from 6 April 2016 that affect those who have property income.

Rent-a-room increase

The first change is to the rent a room scheme. The government has increased the allowance from £4,250 per year to £7,500 from 6 April 2016. This means if you let out room(s) in your home you can receive up to £7,500 tax free.

Some conditions do apply so seek advice before committing.

What do we think?

This should give people opportunity to gain additional income from unused rooms in their homes and for those who already rent rooms and receive over £4500 per year but under the new limit mean less tax returns to file. Can’t be a bad thing.

Wear and Tear Allowance replacement

Currently furnished lettings can claim a wear and tear allowance each year. This has been a flat 10% of income received regardless of costs actually incurred. This has been abolished from 5th April 2016.

The replacement relief is called Replacement Furniture Relief. The relief works exactly as it says it is allowable for the cost of replacing items of furniture in a rental property (not applicable to holiday lets). Therefore the initial cost of items is not allowable. Only cost of replacement items that are essentially like for like will be allowable any proportion that is considered an improvement will be disallowed.

Please note proceeds for the old item will reduce the amount claimable for the replacement item.

What do we think?

The old method has benefited those who charge higher rents as the relief was calculated as a percentage of income. This was not necessarily reflective as a £400 washing machine is £400 regardless of what rent your charge your tenant. This should bring the relief in line with actual expenditure and be fairer for all.

Restriction to finance relief

Perhaps the most significant change is to the tax relief allowed for the interest charged on the finance interest. This restriction is only applicable to higher rate tax payers and will be introduced gradually.

The effect will be that higher rate tax payers will eventually only be allowed basic rate tax relief on all interest charges on finance to purchase the property. It will gradually be introduced as follows:-

*Please note the restriction is made against the interest charge and is not a tax charge so if you are a basic rate tax payer currently you could become a higher rate tax payer.

What do we think?

We have a split view depending on if you are a higher or basic rate tax payer.

For higher rate tax payers this is no doubt a concern. You have very limited options. A limited company will be difficult as finance is generally harder to find not to mention the stamp duty and capital gains tax costs of making the change. Re-financing is one option to find lower interest rates and ease the burden. The final option is if you have a spouse who is a basic rate tax payer then you change the ownership so as all or more of the income is split to them. This does change the actual ownership though and potentially requires a solicitor. The only part that softens the blow is that at least it is staged over a number of years.

For basic rate tax payers there are big advantages. People in this category will see no change in the tax charged and the playing field becomes that bit more level. Those with higher income cannot just borrow large amounts and then get higher tax relief.

Overall we may see a fall or at least a slow in the rise of house prices as competition from buy-to-let landlords is likely to decrease.

Stamp Duty

Changes have taken affect already (April 2016) for purchases of a second home or buy-to-let residential property in relation to Stamp Duty Land Tax (SDLT).

*Please note the restriction is made against the interest charge and is not a tax charge so if you are a basic rate tax payer currently you could become a higher rate tax payer.

What do we think?

Clearly it is another attempt from the government to reduce the number of second homes and buy-to-let properties owned. This should have the effect of more houses available to purchase and more competitive pricing and less buyers. Obviously for those wishing to purchase a second home or buy-to-let property there is now a clear increased cost.


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