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UK Gov't Defends Changes To Landlords' Tax Relief

by Robert Lee, Tax-News.com, London

13 October 2015


The UK Government has responded to the Residential Landlords Association's request that it should rethink plans to restrict mortgage tax relief and reform the "wear and tear" allowance.

In a letter to the RLA, the Financial Secretary to the Treasury, David Gauke, said: "The Government wants a fair tax system. That means ensuring that landlords with the largest incomes no longer receive the most generous tax treatment."

The Summer Budget proposed the restriction of relief for mortgage interest for individual landlords to the basic rate of income tax (20 percent). This measure will be phased in over four years, starting from April 2017.

According to Gauke, "By restricting finance cost relief available to the basic rate of income tax, all finance costs incurred by individual landlords will be treated the same by the tax system."

He explained: "Landlords will continue to get full income tax relief on the costs incurred in letting out a property, such as letting agency fees and replacing furniture, as others do on the costs they incur in carrying out a trade. Finance costs are different as having a mortgage on a property also allows the landlord to purchase a more expensive property and incur larger gains on the investment than they would have done without the mortgage. The Government wants to rebalance relief for these finance costs and ensure that all individual landlords get finance cost relief at the same rate."

Gauke added that the Government does not expect the reform will have a large impact on house prices or rent levels, as only one in five landlords is expected to pay more tax as a result.

Gauke rejected the RLA's recommendations that the measure be recast to ensure that the right of deduction is retained, even if interest is only relieved at the basic rate, and that it only apply to new borrowings. He said that these proposals "would lead to landlords with very similar circumstances being treated differently." This goes against the Government's policy intention "to make the tax system fairer and ensure that all individual landlords with residential property income are treated the same," he said.

The Budget also included plans to reform how landlords can account for the costs they incur in improving and maintaining rental property. Currently, landlords of furnished properties can deduct ten percent of their rent from their profit to account for "wear and tear," irrespective of their expenditure. From April 2016, this allowance will be replaced with a new system that enables landlords to only deduct costs they actually incur in improving a property.

The RLA has raised concerns that this measure will reduce investment in repair, renovation, and improvements, and result in lower housing standards for tenants. In his letter to the RLA, Gauke said that landlords are required to maintain properties to a legal minimum standard. "The reform to the wear and tear allowance means that all landlords will now be able to offset the costs of replacing furnishings in their properties removing the previous disincentive to do so," he added.

The RLA said that it was disappointed with the reply and will continue to lobby to ensure that landlords' voices are heard.

TAGS: tax | investment | tax incentives | interest | United Kingdom | fees | tax credits | tax rates | tax breaks | tax reform | standards | trade association | trade

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