Restriction on finance costs
The restriction in the deduction for finance costs mean that most landlords will see their annual tax bill increase 
considerably over the coming years. By 2020/21 there will be a substantial difference between their ‘commercial’ profits and the profits on which they are subject to tax.
Unsurprisingly, those affected and their advisers have been critical of the changes.
A group of landlords fronted by Cherie Blair, have challenged the legality of the changes in the High Court by campaigning for a judicial review. The action has been unsuccessful, but it is unlikely to mark the end of the lobbying as the full force of the phased in changes are felt.
Loss of the Wear & Tear allowance
The Wear & Tear allowance was claimed by many landlords letting furnished property but has been withdrawn from 6 April 2016. In simple terms, the relief allowed a 10% reduction of the assessable profits to account for the cost of replacing furniture.
Instead, Landlords can now claim ‘Replacement Domestic Items Relief’. This will allow a deduction for the cost of replacing furniture or appliances (like for like) when incurred.
The loss of the Wear & Tear allowance will not be as significant as the other changes. However, landlords following less frequent refurbishment programmes may be worse off.
Stamp Duty Land Tax
The 3% hike in SDLT for buy-to-let properties is likely to slow or halt property business expansion plans. Indeed, a recently published report found that SDLT was the biggest barrier to the growth of the UK property market.
What next?
It seems unlikely that the government will reverse or alter the changes anytime soon. Landlords will therefore be forced to act as their current business plans may no longer be sustainable.
Many are considering incorporating their property business and this is something that we advise on regularly.
The changes to the treatment of finance costs do not apply to companies, so they can still benefit from a full deduction for such expenses. In addition, lower corporation tax rates mean that this can be an attractive option.
Where a portfolio is ‘actively managed’ by the landlord, it is possible for him/her to incorporate the business without incurring a Capital Gains Tax charge. In certain circumstances relief from SDLT can also be claimed.
If you would like to know more or discuss this further, please do not hesitate to contact us.
