Thousands of landlords are still working on this year’s tax returns – but the year ahead is one of big tax changes and complicated record keeping.
Landlords need to be aware of new tax rules for property businesses that start from April 2016 that mean working to separate sets of rules.
January 31, 2016 is the filing date for property income and expenses for the year to April 5, 2015.
The rules change on April 6, 2016 when the 10% Wear and Tear Allowance is scrapped.
That means the January 31, 2017 tax return is based on the current rules, but the new Replacement Relief starts on April 6, 2016 but will not have an impact on tax returns until January 31, 2018.
The main changes affect all buy to let landlords.
Wear and Tear Allowance until April 5, 2016
Landlords renting out furnished buy to lets can claim the 10% Wear and Tear Allowance.
This is calculated as 10% of rents after deducting the cost of any services paid by the landlord on behalf of tenants.
For example, if a landlord rents out a furnished home at rent of £650 a month and pays £35 a month towards utility bills, the 10% Wear and Tear Allowance is calculated as:
- Annual rent = £650 x 12 = £7,800
- Bills paid for tenants = £35 x 12 = £420
- 10% Wear and Tear Allowance = (£7,800 – £420) x 10% = £738
Furnished buy to let landlords can claim whether they have spent any money replacing furniture or appliances or other items during the tax year.
Unfurnished buy to let landlords can claim nothing for replacing furniture or appliances unless the appliances are integrated, such as built-in fridges. This replacement cost would be claimed as a repair.
Replacement Relief from April 6, 2016
Landlords of furnished or unfurnished buy to let homes can claim replacement relief.
However, they can only claim the replacement cost of an item plus the cost of disposing of the old item less any payment received against the disposal.
The main change is instead of receiving a notional payment each year as a tax deduction, all landlords can only claim for actual replacement costs.
The replacement must be purchased for the use of a tenant.
Landlords receiving Rent-A-Room Relief or spending on replacements in uncommercial lets are excluded from making claims.
Tax tip
If you are planning any replacements, leave them until after April 6, 2016, when the full amount will be covered by Replacement Relief.
Furnished buy to let landlords will still receive the 10% Wear and Tear Allowance up to April 5, which will cut the amount of tax they pay. The spending can then be offset in full in the next tax year.
Landlords with unfurnished buy to lets should wait until April 6 as well, so they can offset the spending against tax, which they cannot do now.
