At Horsfield & Smith, we strive to keep our clients informed of the latest changes in tax law updates that may affect their business and personal finances. Recent updates to property taxation have significant implications for landlords of residential properties. Below is a summary of these critical changes and how they might impact you.
Restriction of finance costs relief for individual landlords
Finance costs include mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. The government has introduced a phased restriction on relief for finance costs on residential properties, limiting it to the basic rate of income tax. This transition began in April 2017 and concluded in April 2020.
Landlords can no longer deduct all their finance costs from their property income to determine their property profits. Instead, they receive a basic rate reduction from their income tax liability for their finance costs. Here’s how the relief is structured:
- 2019-20: 25% of finance costs deductible; 75% available as a basic rate tax reduction.
- From April 2020: All finance costs provided as a basic rate tax deduction.
The table below illustrates the overall effect, assuming a basic rate of 20%:
| Year | % of Costs Allowed as Deduction | % Remaining of Costs Subject to Basic Rate Tax Relief | Effective Tax Relief at 20% on Remaining Costs |
| 2017-18 | 75 | 25 | 5 |
| 2018-19 | 50 | 50 | 10 |
| 2019-20 | 25 | 75 | 15 |
| 2020-21 & beyond | 0 | 100 | 20 |
In certain circumstances, any excess finance costs can be carried forward to subsequent years. Note that these changes do not affect furnished holiday lettings or non-residential property lettings.
Reform of the wear and tear allowance
The previous wear and tear allowance for fully furnished properties has been replaced with a relief that enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware, excluding fixtures.
This new relief applies to the cost of a like-for-like, or nearest modern equivalent, replacement asset, plus disposal costs, less any proceeds received for the replaced asset. Fixtures integral to the building, such as baths, washbasins, toilets, boilers and fitted kitchen units, are considered repairs to the property and thus deductible as expenses.
Landlords no longer need to assess whether their property is sufficiently furnished to claim this relief. This new measure took effect for expenditures incurred on or after 1 April 2016 for corporation tax payers and 6 April 2016 for income taxpayers. However, this deduction is not available for furnished holiday lettings, as capital allowances remain applicable for them.
Rent a room relief increase
This measure benefits those earning rental income from letting out a room in their main residential property. “Rent a Room receipts” include payments for meals and cleaning services associated with the room’s rental. This relief is also applicable to rooms in a guest house, bed and breakfast or similar establishments, provided it is the owner’s main residence.
From 6 April 2016, the tax-free income threshold increased to £7,500 per year from the previous limit of £4,250, which had been unchanged since April 1997. If two or more people share the rental income from the same property, the relief is halved for each individual.
Expert business tax advice from Horsfield & Smith
Navigating the complexities of tax law updates can be challenging. At Horsfield & Smith, our team of experts is here to provide you with the best business tax advice to ensure you remain compliant and make the most of available tax reliefs.
For personalised advice and to discuss how these changes may impact you, contact Horsfield & Smith today. Our dedicated professionals are ready to assist you with all your tax-related queries and help you plan effectively for the future.
Contact us now to schedule a consultation and stay ahead with expert tax guidance from Horsfield & Smith.
