In last week’s Budget, George Osborne made several announcements relating to landlords. Here’s how each of these changes will affect property investors and their businesses:
Rise in rent a room relief
Rent a room relief is provided to homeowners who rent space in their own home, usually to a lodger, as this is not restricted to single rooms.
The property owner can choose how to be taxed on the income they receive from a lodger. They can be taxed on the amount of rent received in excess of the financial limit, or calculate the profit or loss from renting and be taxed on this instead. The relief is often the best way for someone to take in a lodger.
The amount of relief will increase from £4,250 to £7,500 from April 2016. Small B&Bs will also benefit as they can claim the relief as well, as long as the owner lives on the premises.
The rise is above inflation over the period from when the allowance was introduced in April 1992 to now. If it were increased in line with inflation, the allowance would now be £6,854.
End of wear and tear allowance
Landlords that rent out fully furnished properties can claim a tax deduction of 10% of the rent they receive each year to cover the cost of replacing furniture. This is the wear and tear allowance. They can also claim when they replace items such as crockery, utensils and linen, as and when they spend the money.
From April 2016, the wear and tear allowance will end. It will be replaced with a deduction for landlords when they actually spend the money. It is yet to be confirmed whether the deduction will apply to all expenditure, including kitchen appliances, and if it will be subject to a cap.
Landlords of partly furnished homes were stopped from claiming for the replacement of white goods in 2013. Some of these landlords now offer fully furnished properties, so will also be affected by the new changes.
Cut in tax relief on interest
Full tax relief is currently available for interest on a loan used in a property business. The funds could be used to buy a rental property, to make repairs or to finance the working capital of the business.
From April 2017, tax relief on interest in property businesses will be cut so that by 2020, tax relief will be 20%.
If a business has a low level of interest compared to the borrowings, it will not be too greatly affected. However, landlords with larger portfolios will see their business models change significantly.