The Chancellor announced in the Summer Budget (July 2015) that Mortgage Interest Relief for residential landlords would be restricted to the basic rate of income (20%). In addition, landlords will no longer be entitled to an automatic entitlement to a wear and tear allowance for furnished properties.
How does this affect me as a Non Resident Landlord?
Mortgage Interest Relief:
The current rules enable Landlords to claim relief on finance costs which can be used as a deduction against rent. The new rules which will be gradually phased in over a three-year period, the first of which coming into effect 6th April 2017, will allow relief to be claimed as follows:
? 2017/18- The deduction from property income will be restricted to 75% of the finance costs incurred, with the remaining 25% being available as a basic rate reduction.
? 2018/19- 50% of the finance costs will be given as a deduction and the remaining 50% will be given as a basic rate reduction.
? 2019/20- 25% of the finance costs will be given as deduction and the remaining 75% will be given as a basic tax reduction.
The case study that I have drawn up below will help to explain how these changes above will affect yacht crew:
Alfonso who works on a 70m Feadship, as 2nd Officer he earns £100,000 per year which he claims the Seafarers Earnings Deduction tax exemption on. He has a Buy to Let portfolio which generates £50,000 per year in rent. He pays £30,000 per year in mortgage interest costs and other costs are £5,000 per year.
The current tax relief rules mean that Alfonso would only be liable to pay tax at 20% for his £15,000 rental profits. However, when the above changes are fully implemented he would be taxed on £36,000 deducting £5,000 in actual wear and tear costs and applying the 20% relief for his mortgage (£9,000). His gross tax liability would be £7,200.
Wear and Tear Allowances
April 2016 the formal Wear and Tear Allowance; which allows 10 per cent of rental profits to be written off for notional wear and tear, even if there has been no such actual expenditure, will be replaced with a relief that enables all landlords to deduct actual costings. One important point is that properties will no longer need to be sufficiently furnished to claim this relief as it will apply to all residential dwellings.
Stamp Duty changes:
Finally changes announced in the Spending Review and Autumn Statement will add 3 percentage points to the rate of stamp duty by those who already own property from April 2016. The result of this increase will see the tax bill on a buy-to-let property costing £250,000 will jump from £2,500 to £8,800.
The changes outlined in the budget will no doubt affect yacht crew who are fortunate enough to be landlords. However, as the majority of yacht crew claim the Seafarers Earnings Deduction and are thus on the lowest tax bracket they will not start to feel the effects of these changes until 2020. There is definitely a consensus amongst Landlords that the restriction of tax relief will necessitate the need to raise rents. The government has still not addressed the housing crisis we are currently facing, when demand out strips supply, rental increases will be achievable and only limited by tenant’s ability to absorb the increase.
It would advisable to look to consolidate and not expand your portfolio. The risk that new landlords face who come into the market in 2020 with a high Loan to Value ratio is that the property could be negatively geared. However, if you choose to pay down your mortgage you will still be able to receive a profit and enjoy the capital growth that we all know and love.
If you require any advice on the points raised in this short article, please feel free to email me: email@example.com
Any tax advice in this publication is not intended or written by Marine Accounts to be used by a client or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party matters herein.