Senior Accountant, Hayley Robins, outlines the important HMRC changes you might have missed but that you need to know about from the summer budget.
Hayley Robins blogs:
The summer budget told us about all sorts of changes to the way different types of income are taxed. Whilst there was some good news, reduction in corporation tax rates and an increase in the personal allowance, for example, landlords and business owners, in particular, will be adversely affected by some of the changes that are coming into effect.
If you are a landlord you will know that you have to pay tax on any profit you make from your buy-to–let properties, at a rate of 20%, 40% or maybe even 45% depending on the level of your income. Currently, HMRC allows landlords to claim any mortgage interest against their income to reduce the amount of profit that is taxable which consequently reduces the amount of tax payable. Relief on this mortgage interest is obtained at the same rate as the income is taxed i.e. 20%, 40% or 45%.
However, HMRC has now restricted this level of relief to just 20%. Therefore, if you only pay basic rate tax (20%) this change won’t affect you. But if you are a higher rate of additional rate tax payer (40%/45%) you will see you taxable rental profits increase and as such a higher tax bill!
This change will be phased in over 4 years starting from April 2017. Another change is that from April 2016 the ‘wear and tear’ allowance, that basically allowed landlords to claim an extra expense roughly equivalent to 10% of rental income will be abolished. This allowance will be replaced by the ability to deduct the actual costs of replacing furnishings from rental income.
Whilst some landlord’s may be better off, most will find that the previous ‘wear and tear’ allowance was more than the expenses they incur on replacing furnishings each year – again increasing the tax payable on rental profits.
All-in-all, we are finding that most landlords with more than a couple casual properties are now thinking about alternative mechanisms to mitigate these changes, potentially incorporating or using pension structures to side-step the biggest issues.
To discuss your specific circumstances please contact your account manager or if you have any other questions about the budget please call us on 01872 300232 or email us at [email protected].