The summer budget was not good news for owners of properties that are let out on the shorthold tenancy market.  The annual Wear and Tear allowance is set to be scrapped along with higher rate tax relief against mortgage interest.

Wear & Tear Allowance

This is a popular deduction against gross rent where the property is let out furnished.  Rather than claiming for the cost of renewing the furniture, which in reality may not be very often if there is a reliable tenant in place for an extended period of time, 10% of the annual rent can be claimed as an expense and the actual cost of replacing certain furniture is ignored.  Subject to consultation this relief is going to be scrapped and likely replaced by a renewals basis i.e. the cost of an item when it is replaced will be tax deductible but not the initial cost of the item.  HM Revenue and Customs are looking to introduce this with effect from April 2016.

Restriction of Mortgage Interest Relief

This is expected to be phased in from April 2017 over three years.  In future, instead of mortgage interest being given as a deduction against rental income, it will be given as a tax deduction and restricted to basic rate tax only.

This will not only restrict higher rate tax relief but could actually push taxpayers into higher rate.

In addition as mortgage interest will no longer reduce income, taxpayers’ total income could exceed certain thresholds for such things as the Child Benefit Higher Rate Charge or University grant applications.

Couples should look at holding rental properties in joint names where one has income below the personal allowance.  Alternatively properties could be held in a limited company but whilst the tax rate is low there could be complications regarding any mortgages and potentially capital gains tax.

Refinancing – some good news!

It is possible to re-mortgage a rental property using the funds for whatever purpose and obtaining tax relief on the interest to the extent that the loan does not exceed the value of the property when it was first rented out.  However, where the value of a property has increased significantly there is likely to be scope for additional borrowings but potentially no tax relief.

By transferring the property to a spouse (as long as it has not been held in joint names), the spouse would be able to re-mortgage up to the date that he/she had begun to let it out i.e. the date of transfer and current market value and obtain tax relief on all of the borrowings.

Susan Jewell