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 0%
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:
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2016/17
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2020/21
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£
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£
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Gross Rent
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13,000
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13,000
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Less:
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Repairs
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2,000
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2,000
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Mortgage interests
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10,000
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Taxable Rent
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1,000
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11,000
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Tax
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40%
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400
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4,400
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Less:
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Interest relief @20% x
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10,000
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-
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2,000
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NET TAX PAYABLE
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400
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2,400
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- 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.
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Illustration II - A basic rate taxpayer becomes a 40% taxpayer
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2016/17
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2020/21
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£
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£
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Salary ( Employment)
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35,000
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35,000
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Rental income after all expenses but before interest
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30,000
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30,000
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Less: Interest on mortgage
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(28,000 )
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-
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Rental income taxable
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2,000
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30,000
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TOTAL TAXABLE INCOME
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37,000
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65,000
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Personal allowance
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(11,000 )
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(12,400 )
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Taxable liable to income tax
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26,000
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52,600
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Basic rate band limit ( assumed)
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32,000
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37,000
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Tax charged @ 20%
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5,200
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7,400
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Tax charged @ 40%
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-
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6,240
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5,200
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13,640
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Tax credit on interest at 20% x 28,000 ( tax reducer)
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5,600
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Total tax payable:
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2,800
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8,040
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Additional tax payable
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5,240
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The tax reducer is determined as the 20% of the lower of :
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the amount of interest
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the total taxable income
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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.
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