Residential Property Issues for Landlords
There have been several recent changes that affect the tax treatment relating to residential properties held by landlords. Here are a few things that you will need to look out for:
Mortgage Interest Subject to Restriction
Tax relief on mortgage interest is subject to restriction from 6 April 2017. A proportion of the mortgage interest is removed from the rental statement expenses claim and instead a tax credit equal to 20% of the interest removed is given in the tax return. The proportion removed is set at 25% for 2017/18, but this is set to rise to 100% of mortgage interest cost over the next few years.
As you can see, this will only affect higher and additional rate tax payers, as basic rate tax payers would have received 20% relief on the mortgage interest which is equal to the new tax credit. Higher rate tax payers will lose out on 20% tax relief and additional rate tax payers will lose out on 25% tax relief on all mortgage interest.
Landlords with significant borrowings against their rental properties and who will be affected at the higher and additional tax rates should get in touch with their usual client relationship partner or manager to discuss how the loss of tax relief can be mitigated.
Extra 3% on Stamp Duty Land Tax
Should you wish to expand your property portfolio and purchase an additional property then you will find that you are now subject to an additional rate of Stamp Duty Land Tax (SDLT). This will be an additional 3% on the cost of properties over £40,000. This needs to be considered before purchase.
In certain circumstances you can even get caught by the new rules if you are selling your home to purchase a new home. If you have rental properties and purchase a new home, to avoid the charges, you need to sell your previous home. Should you move in to rented accommodation temporarily between the sale of your old home and purchase of your new home, then you may be subject to the additional 3% tax charge.
Transferring Property to a Spouse
As you may be aware, transfers between spouses (including civil partnerships) are exempt for capital gains tax purposes. There is, however SDLT to consider.
If property is jointly owned by a married couple (civil partnership), then it is deemed to be owned 50/50, unless you elected to have it taxed on your formally owned share as tenants in common rather than as joint tenants.
With the change in the tax relief on mortgage interest, you may think that it is a good idea to change the ownership percentages of your rental properties to ensure income is in the hands of a basic rate tax paying spouse. Should you need to change the actual ownership, this will require formally transferring property to your spouse. This will have to be done with the correct legal documentation in place. Should your rental property have a mortgage, then this may potentially trigger an SDLT charge, the additional 3% may be charged on the value of the loan transferred.
You will need to consider this when considering transfers between spouses or civil partners.
There are a few things to consider when moving abroad with regards to rental properties. Firstly, if you are going to keep the properties, you will become a non-resident landlord.
As such, you should have 20% tax deducted at source on the rental income. If you have a letting agent, then they will be responsible for paying over the tax to HMRC. If you do not have a letting agent, then it is the tenant’s responsibility to pay HMRC on your behalf.
You can avoid this by applying to be in the Non-Resident Landlord Scheme. If you are accepted, then there is no need to have tax deducted at source. You will still have to keep up with your tax returns or you will be removed from the scheme.
If you are already non-resident and selling your residential property, then you are required to inform HMRC with 30 days, otherwise late notification penalties are applied. These are £100 if up to 6 months late, a further £300 (or 5% of tax due if greater) if more than 6 months late and a further £300 (or 5% of tax due if greater) if you are more than 12 months late. Therefore, if you wait to complete your tax return, you may find that you already have substantial penalties.
Please ensure you notify your usual client relationship partner or manager as soon as you are thinking about selling a property, so you can have access to the right advice and assistance with the HMRC obligations.
Here are some further changes that came into effect on 6 April 2017, and which you will need to consider when providing information for/completing your tax return for the year ended 5 April 2018:
Traditionally, rental income and expenses have been declared on an “accounts basis” i.e.:
- Rental income due for the year – rental income is usually payable in advance so an adjustment had to be made for the part of the rents received that were applicable to the following tax year.
- Less expenses applicable to the year – similarly expenses such as insurance which are paid in advance had to be apportioned between tax years.
From 6 April 2017 the simplified cash basis will apply for most property businesses that are run by individuals or partnerships. The profit or loss to be reported under the cash basis is:
- The total amount of income received during the tax year;
- Less allowable expenses paid during the tax year.
The cash basis does not apply if:
- The property business is run by a company or limited liability partnership (LLP), or
- Receipts that would be brought into account under the cash basis for the tax year exceed £150,000. This amount must be proportionally reduced if the property business is only carried out for part of the tax year, or
- An election is made to use Generally Accepted Accounting Practice (GAAP) because the person believes that traditional accounting is more appropriate. The election must be made within one year of the filing date for that tax year.
Transitional adjustments are required in the tax year in which the cash basis is first applied if:
- The business had debts owed to it by tenants at the end of the previous tax year;
- The business owed money to suppliers at the end of the previous tax year;
- Accounting adjustments were previously made for accruals;
- The business had unrelieved qualifying capital allowances.
With effect from 6 April 2017, a new property allowance of £1,000 was introduced. If an individual’s gross rental income is £1,000, the income is not charged to income tax and they have no obligation to notify HMRC if this is a new source of income.
If the gross income exceeds £1,000, the individual has the option to claim the £1,000 allowance as a deduction. They cannot also deduct any expenses of either property business that would otherwise be allowable.
Use of the property allowance is optional, and it may not suit an individual’s circumstances, for example if a property business is loss making. If an individual does not want to use the property allowance, he or she should make an election for full relief not to apply and calculate their profits using the normal rules and complete their Self-Assessment tax return in the normal way.
The property allowance does not apply where rental income is received from:
- A connected employer;
- A connected firm;
- A connected close company.
If you would like to discuss any of the issues raised in more detail or if you would like to speak with a member of our Construction & Real Estate team, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with your local representative.
This article originally appeared on the blog of our member firm, MHA Moore & Smalley.