It has always been something that landlords have had to contend with – taxation. But a number of recent have been put in place, and it is worth reading up on them when possible to ensure you don’t fall foul of the law, and the tax collectors.
There includes, for example, an increase in the rent-a-room allowance. There will also no longer be any wear and tear allowance if the property is let on a furnished basis and is not a holiday let. However, there will be replacement furniture relief instead. And over time, there will be a restriction of higher rate income tax for finance costs. This is likely to be the change that has the most impact on landlords.
Before 6th April 2016, you could earn up to £4,250 each year tax free if you let out a furnished room within your own home. As of 6th April 2016, the amount you can earn in this manner before paying tax increased to £7,500.
Wear and Tear Allowance
As of April 2016, the original wear and tear allowance was replaced with replacement furniture relief. The WTA allowed landlords to claim an annual deduction on 10 percent of their rental income. This went towards replacing furniture when required. The deduction was given whether or not any money needed to be spent on replacing furniture – and no extra was given if more was needed. Since it was based on property value, it was seen as an unfair deduction. Therefore, the replacement furniture relief (RFR) has replaced it. This now means that if anything needs to be replaced, the money can be requested to do so.
Higher Rate Income Tax Relief for Finance Costs
The gradual restriction of income tax relief will, by 6th April 2020, mean that landlords can no longer deduct their finance costs from their property income. They will instead receive a basic rate reduction. This could mean that basic rate tax payers find that they are now higher rate tax payers. This is certainly something to look out for.
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