Local accountants and tax advisers, Trueman Brown, advise landlords to numerous changes made to property income tax regime.
In May 2015, the Conservative Party shocked expectations and gained a majority at the General Election.
The new Government then shocked taxpayers by increasing taxes in a number of areas, the most publicised changes occurring in the way property taxes will be levied on non-limited company landlords.
There were two main changes to the way property income will be taxed in the future:-
The restriction of relief on finance costs
From 2020/21 onwards, mortgage (or loan interest) tax relief relating to the purchase of the residential buy-to-let property will be restricted to the basic rate of tax (currently 20%).

This restriction will take place in stages:-
- 2017/18 – 75% of interest paid will receive higher rate relief, 25% will receive basic rate relief;
- 2018/19 – 50% of interest paid will receive higher rate relief, 50% will receive basic rate relief;
- 2019/20 – 25% of interest paid will receive higher rate relief, 75% will receive basic rate relief;
- 2020/21 – all interest will receive only basic tax relief.
Removal of the wear and tear allowance
Currently, where landlords let residential property let furnished, a Wear & Tear allowance can be calculated as 10% of the rental income less ground rent and council tax. This is to compensate landlords for wear & tear of furnishings.
This allowance will be abolished from April 2016 and replaced with a new relief that allows all residential landlords to deduct the actual cost of replacing furnishings only.
What are the tax effects of these changes?
To demonstrate the significant tax effects these changes will make, here is an example:-
Bill, a higher rate taxpayer (i.e. 40%) owns a furnished buy-to-let personally. He earns £12,000 a year from the buy-to-let and pays mortgage interest of £5,000 per annum on an interest only mortgage. He also makes an annual claim for wear and tear allowance.
How much tax would Bill pay on the property income under the old and the new rules.
Old Rules | New Rules | Tax Increase | |
Income | 12,000 | 12,000 | |
Wear and tear allowance | 1,200 | ||
Loan Interest | 5,000 | ||
Taxable Rental Income | 5,800 | 12,000 | |
Tax @ 40% | 2,320 | 4,800 | |
Mortgage Interest Relief @ 20% | 1,000 | ||
Total Tax | £2,320 | £3,800 | £1,480 |
Effect on owners of Buy-To-Lets
A higher or top rate taxpayer who is looking to invest in residential property needs to consider all his ownership choices and whether there is a better overall structure than personal ownership.
The solution will not be the same for everyone and will depend on individual circumstances.
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