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I own a buy to let property and/or rent a room in my main residence. What do the new Budget changes from 6 April 2016 mean for me?

Last year’s Summer Budget announced on 8 July 2015 introduced key changes for individuals with property income. If you rent a room in your main residence or own a buy to let property, the following changes are key for your end of year tax return:

Rent a Room: The Good News

For those who ‘rent a room’ to a lodger in your main residence, from 6 April 2016 you will benefit from the budget’s announcement to increase the rent a room allowance (the amount of tax free income you can receive from your lodger) from £4250 to £7500 per annum. Therefore you can receive an additional £3250 income tax free every year from renting a room in your main residence, which represents a substantial tax saving for a basic rate tax payer of £650 per year.


Buy to Let Property: The Bad News

For those of you who own properties that you let out, the budget had more of a detrimental impact, especially for those who let furnished properties.

Firstly, the budget announced the restriction of tax relief on mortgage interest on individuals to the basic rate tax band, currently at 20%. Therefore if you have a mortgage interest expense to set against the property income on your tax return the tax relief has now been restricted to the basic rate level of tax. This affects higher tax rate payers, as it will reduce their tax relief on the mortgage interest expense and result in a higher tax bill.  To further complicate matters, this will be phased in over a four year period from April 2017.

Secondly, for furnished lets, from April 2016 onwards, the wear and tear allowance has been abolished. Landlords can now only claim (certain) expenses that have actually been incurred in the year against their letting income, which may be considerably less than the wear and tear allowance previously available to be claimed at a rate of 10% of the relevant rental income. In addition, if relevant rental expenses are to be claimed on the landlord’s end of year tax return, they must maintain receipts as evidence of the relevant expenditure. Therefore if you are a landlord with a furnished property let, we would advise deferring the replacement of any furniture or furnishings until after 5 April 2016.

These changes will be reflected on the personal tax returns of any individual who owns property from 6 April 2016. If you would like any assistance completing your tax return due to the proposed changes, or you would like further information on this subject, please feel free to contact the team at Spirare.