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Buy-to-let landlords. Current and impending changes

INDUSTRY NEWS OCTOBER 2015

Buy-to-let landlords. Current and impending changes

Real Estate News - October 2015

Impending Tax imperatives

It will be recalled that the Chancellor of the Exchequer in his summer budget alluded to tweaking the tax regime in respect to residential buy-to-let property owners. The stated fundamental objective is to make the tax regime in this sector fairer and more efficient ensuring that landlords with higher incomes pay taxes commensurate with their rental income portfolios.

The two major changes to come are:

  • a. The abolition of the 10% “wear and tear” allowance from April 2016

Abolishing the 10% “wear and tear” allowance: the present state of play is that landlords of furnished properties can factor in a 10% “wear and tear” deduction off their rental income less any expenses that are usually borne by the tenant (e g council tax or utility bills). However effective from April 2016, landlords will only be able to deduct the actual cost of replacing furniture as and when they are replaced. In many cases this will result in a lesser deductible expense than the current 10% leading to a greater tax liability on the landlord.

  • b. Restricting finance cost deductions allowable when calculating taxable rental profits by limiting such calculations to the basic rate of tax-20%

Finance cost deduction restriction to the basic tax rate of 20%: Again at present the amount of loan interest paid on loans used in the purchase, maintenance and improvement of a dwelling is fully deductible when deducing rental profits and tax payable. From April 2017, buy-to-let property owners who are individual (including individuals involved in partnerships) will only be able to deduct finance cost up to the basic rate of tax-20%. To mitigate the effect of this change on landlords, it will be phased in over a four year period with the full effect of all financing cost incurred by a landlord assessed on the basic rate slated for the 2020/2021 fiscal year.

Discerning landlords will have to factor in the impacts of these changes to their commercial strategies and bottom lines. The abolition of the 10% “wear and tear” allowance would invariably mean landlords would have to keep detailed records of expenses, adding another layer of administrative burden to their businesses. Both changes will also in most cases result in significant spike in the amount of tax paid by landlord from rental incomes with the imperative of improved management efficiencies to keep sustainable profit margins.

Obligation to fit Smoke Alarms and Carbon Monoxide Detectors in Premises

As from October 2015 there will be a legal obligation on landlords to install and maintain Smoke Alarms and Carbon Monoxide Detectors in houses and flats which are residential premises. Houses in Multiple Occupation are also caught up in the new rules.

It is instructive that “residential premises” include premises all or part of which comprise a dwelling. So, for example a flat above a commercial shop will come under this obligation. Also a “tenancy” includes a licence to occupy a residential premises as well as sub-letting. The obligation is confined to England alone (not Wales) and impose a civil penalty of £5,000.00 for breach.

Though there are stipulated exemptions from the obligation (Hostels, Care Homes and Hospitals), landlords are well advised to adopt systems and procedures to ensure they comply with this obligation and avoid hefty fines for its breach.

Tenancy Deposit Scheme Changes

The Deregulation Act 2015 among other things provides that landlords do not now have to renew their Tenancy Deposit Scheme Certificates after the initial tenancy lapses if the same tenant elects to continue with the tenancy, say on a periodic tenancy. This provision which overturned a court’s decision in the popular Superstrike case is a welcome development as it removes a layer of bureaucracy in the management of their investments.

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