Summer budget rental income tax changes

In yesterday’s summer budget there were three significant tax changes announced that will affect future rental income:

1) The tax relief on mortgage interest will be reduced.

At present you can receive full tax relief for mortgage interest against a rental property, whether you are a basic rate or higher rate taxpayer.

From 6th April 2017 this is planned to be reduced, until from 6th April 2020 when there will only be basic rate tax relief available. If you are a basic rate taxpayer then there is no change for you*, this will only affect those who pay higher rate tax.

The change is to be phased in over four years:

2017/18 – 75% full relief, 25% basic rate relief

2018/19 – 50% full relief, 50% basic rate relief

2019/20 – 25% full relief, 75% basic rate relief

2020/21 – 100% basic rate relief

* One wrinkle to watch out for is due to the way the new relief will operate as a tax credit. In the tax calculation the loan interest is initially disallowed, before being granted as a tax credit at the end. This could mean that someone becomes a higher rate taxpayer as a result, losing some relief because of this.

2) The wear and tear deduction for furnished properties is to end.

At the moment landlords can claim a deduction in the rental accounts to cover wear and tear, which is calculated as 10% of rental income.

From 6th April 2016 this is to cease, and be replaced with a new relief that allows the costs for actual replacement of furnishings. There will be a technical consultation on this new relief published in due course.

3) The allowable limit for rent a room income is to be increased.

At present, you are allowed to earn rental income for letting a room or rooms in your own home of up to £4,250 tax-free.

This limit has remained the same for many years, but from 6th April 2016 the limit is to be increased to £7,500