Landlords face changes in the amount of relief that can be claimed for finance costs, which includes mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying these mortgages and loans.
The first change is the removal of the wear and tear allowance from April 2016. This will apply to both individual and corporate landlords, and will increase the taxable profits from furnished properties by 10% at a stroke.
Instead of the flat 10% of rents deduction, landlords of all residential properties (furnished and unfurnished) will be permitted to deduct the actual cost of replacing furnishings, free-standing appliances, carpets, curtains and other loose items provided in the property. This will align the tax rules between furnished and unfurnished properties. Note the initial cost of providing the furniture etc, won't be deductible.
The second major change is the removal of the interest and other finance costs as a tax deductible expense. This will only affect individual landlords, not companies. From 6 April 2017 the amount of interest deductible for tax purposes will be restricted to 75% of the amount paid. This restriction will increase to 50% in 2018/19, and 75% in 2019/20, and from 6 April 2020 100% of the interest will be denied as a deduction.
In place of the interest deduction the landlord will receive tax credit equivalent to 20% of the restricted amount of interest. The following is a simplified example (ignoring other deductible expenses) of how the effect on a landlord who pays tax at 40% in 2016/17 compared to 2020/21.
The Chancellor also announced an increase in the rent-a-room relief from £4,250 to £7,500 from April 2016.