Since writing the original blog on rental income, there have been a couple of significant changes.
The first relates to the wear and tear allowance. This change takes effect from April 2016 so we are just at the end of the first tax year affected by this change.
Under the old system, landlords with furnished property could make a deduction of 10% ( possibly with a few small adjustments) of their rental income in calculating the taxable profit.
This will affect all residential landlords whether personal or corporate.
Under the new rules, the costs actually incurred on replacements will be an allowable deduction
A complication arises where the replacement is not like-for-like (or the nearest modern equivalent) since the cost of any improvement is not an allowable deduction.
The second change relates to the deduction of finance costs (for example, mortgage interest) in arriving at taxable profits. This deduction would have caused tax relief at the top rate of tax being paid by an individual, often at 40% or even 45%. Restriction of this relief will now be phased in from April 2017 with 25% of the finance costs only achieving basic rate tax relief. This basic rate element will increase to 50% in 2018/19, 75% in 2019/20 and will be entirely at basic rate only from 2020/21.
The effect of this change is that from 2020/2021, all taxpayers with rental income, whether personal or corporate, will receive the same tax relief (20%) on their finance costs, regardless of their tax rate.
The structure of holdings of residential, rental property should be reviewed in 2017/18 for existing holdings and as new acquisitions are planned going forwards.
Good advice should consider the situation on a case by case basis because there are other factors, including other taxes to consider.
Partners who together own rental property and are not married can agree to how any taxable income should be split. However this is not so straight forward when the partners are married.
Married couples often own property as joint owners. This means that they jointly own the entire property in equally shares. The split of any rental income is 50:50. It should also be noted that in this situation, where one spouse dies their share in the property goes to the surviving spouse and can not be treated otherwise by the will.
The alternative is to hold the property as tenants in common. This allows distinct shares in the property, which need not be equal. It also allows the will to determine what will happen to the share property in the event of death.
Where the percentages of beneficial ownership between husband and wife are formally amended, HM Revenue & Customs must be notified within 60 days by lodging Form 17 ("Declaration of beneficial interests in joint property income").
