Taxing Rental Income – Budget Changes

If you have rental income or a lodger living in your house then you should be aware of the changes to taxing rental income announced in the recent budget statement. And there is good news and bad news…

The good news is that the rent-a-room allowance, which has remained unchanged since 1997, will go up from £4,250 to £7,500 from next April to reflect modern rents. That means you can received £7,500 from a tenant before you have to do more than simply tick a box on your tax return. The income is then tax-free. If you receive more than that amount then you have to decide whether to declare the whole amount minus allowable expenses, or simply declare the income over the £7,500 threshold. That should encourage letting of empty rooms without fear of an unexpected tax bill.

The news for landlords letting out properties is not so good for a couple of reasons. Firstly, because of the reduction of tax relief on mortgage interest which will be reduced to the basic rate. This measure is going to be phased in over four years from April 2017. We still await more details of how this is going to be done but is clearly going to increase the tax liability of landlords once this measure is implemented.

Secondly, the 10% Wear and Tear Allowance will no longer be available from April 2016. So, instead of making a straight 10% deduction of gross rents each year in compensation for replacement of furnishings, only the actual replacement cost will be deductible. It will make sense wherever possible to delay replacements until the next tax year in order to maximise the benefit of the expense.

Rental income can still be a good investment but careful calculation is necessary in order to ensure that your cash flow works out. If you would like our assistance in reviewing how your situation is affected by the changes to taxing rental income then please don’t hesitate to get in touch.