REMOVAL OF WEAR AND TEAR  ALLOWANCE FROM  APRIL 2016

From  6 April  2016 the wear  and tear  allowance  ( generally  10% of rental

income ) will be abolished. Landlords will  be allowed to claim  the costs of

replacing the asset. The  change  will be  introduced  in  the Finance Act 2016.

Will there be restriction on what asset  is claimable ?

 

INTEREST PAYABLE ON MORTGAGE / RENTAL  BUSINESS LOAN

At present interest payable on loan  used to purchase land and property which

is used in your property business is  deductible as an expense. This also applies

to interest on loan taken for repairs and improvements.

Interest relief is also extended  to re-mortgaging  in order to withdraw your

original capital, insofar that your capital account does not  become overdrawn.

Interest on loan borrowed on your own residence  is also tax deductible if the

funds  have been wholly and exclusively  spent in the buy to let  business.

 

Restriction of interest deduction from April  2017

From 6 April 2017  interest  for the property business, including the single buy

to let  will no longer  be deductible as an expense in computing the profit of the

  property business/ buy  to let. Instead 20% ( basic rate ) of the amount  of the

interest  will be given as a tax reducer.

 

This  change  will be phased in over four year and thus  fully implemented  in the

tax year 2020/21.

 

Tax Year                       % of interest allowed                % of interest given at 20% tax reducer

2017/18                                 75%                                                   25%                

2018/19                                 50%                                                   50%    

2019/20                               25%                                                 75%

2020/21                             100%                                                  0%

 

Where  the  interest  is low the impact will not be severe but where the portfolio is

heavily mortgaged the impact  will have a profound negative effect.

 

 

 

        Illustration I

Someone  who has a full time job and  paying tax at 40%  and  has a buy to let as

an investment:

 

             
             
       

2016/17

 

2020/21

       

£

 

£

             
 

Gross  Rent

 

         13,000

 

     13,000

             

Less:

Repairs

   

           2,000

 

        2,000

 

Mortgage interests

 

         10,000

   
             
 

Taxable Rent

 

           1,000

 

     11,000

             
 

Tax

40%

 

               400

 

        4,400

             

Less:

Interest relief @20% x

 10,000

 -

 

        2,000

             
 

NET TAX PAYABLE

 

               400

 

        2,400

             

 

  • The  higher   the interest  ratio to rental income the more  tax  will be triggered 

          as a  result of this change.

 

  • The  property net  income is now £11,000 as opposed  to £1,000. If this takes

              the individual's income above £50,000 ( when added to other income in the

              same  tax year) , one starts to lose one's child  benefit !

 

  • If the property is    re-mortgaged for a higher amount one stands to lose more

               because the economic profit is ignored

  • in calculating tax or one could face a situation whereby despite an economic loss

           tax  is payable.

 

Heavily geared large property portfolio may become unsustainable. Given the various

interrelated  tax impacts the  policy objective is unclear.

 

Illustration II  - A basic rate  taxpayer becomes a 40% taxpayer

   
         
 

2016/17

   

2020/21

 

£

   

£

Salary   ( Employment)

35,000

   

35,000

         
 

 

Rental  income after  all expenses but before interest

            30,000

 

  

         30,000

 

 

   

 

 
Less: Interest on mortgage

            (28,000 )

   

                  -  

 
Rental income   taxable

              2,000

   

         30,000

         

TOTAL TAXABLE  INCOME

            37,000

   

         65,000

         
 
Personal allowance

            (11,000 )

   

         (12,400 )

         
 
Taxable liable to income tax

            26,000

   

         52,600

         

Basic rate band limit ( assumed)

            32,000

   

         37,000

 
Tax charged @ 20%

              5,200

   

           7,400

 
Tax charged @ 40%

 -

   

           6,240

 

             5,200

   

         13,640

 
Tax credit on interest at 20% x  28,000 ( tax reducer)
     

           5,600

Total tax payable:

              2,800

   

           8,040

         
         

Additional  tax payable

     

     5,240

         
   
             

  

The  tax reducer is  determined as the 20% of the lower of :

 

  1. the amount of  interest

  2. the  total taxable income

  3. the rental profit

     

    Note as the income moves (i) from  £37,000 to £65,000 any child benefit  is  lost.

    Despite an economic loss additional tax becomes payable. Also , bear in mind that

          if one's income goes over   £100,000 the  personal allowance  is  reduced or

           lost altogether. This will also trigger off additional tax.