Private landlords have seen significant tax changes in recent times and there are more to come.

Click through the headings on this page to get a roundup of some of the main changes.

Right to Rent
From 1 February 2016 landlords or their elected agents must not authorise an adult (tenant or member of their household) to occupy property as their only or main home under a residential tenancy agreement unless they have the ‘right to rent’ in the UK. Those with a right to rent include British Citizens, EEA and Swiss nationals, or individuals from outside these countries but present lawfully in England in accordance with immigration laws. The legislation affects new tenancies, and does not apply to renewals provided the parties do not change. Landlords or their agents must complete and document the right to rent checks no sooner than 28 days before the start of the tenancy.

Failure to comply carries a potential £3,000 fine so it is probably wise to take these regulations seriously. If you use a letting agent to find tenants they should take on this ‘right to rent’ check for you. Make sure you get their confirmation, that they are making the necessary check, in writing.

If you deal with your own due diligence, you will need to make checks if you:

  • are a private landlord
  • have a lodger
  • are sub-letting a property

What checks will you have to make?

1. Check adult tenant(s) will live in the property as their only or main home.
2. Ask tenant(s) for the original document(s) that show they have the right to be in the UK.
3. Check the documents are valid with the tenant present.
4. Make and keep copies of the documents and record the date you made the check.
Wear and Tear Allowance
If you are a landlord of residential accommodation which you let fully furnished you will already know that currently you can claim a tax deduction for wear and tear of equipment and furniture you include with the property. The deduction is broadly equal to 10% of the rent you charge.

This 10% wear and tear allowance will be abolished from 6 April 2016. Instead, tax relief will only be given for actual expenditure on replacement furniture, white goods and certain other items. This includes beds, suites, TV’s, fridge and freezer, carpets, curtains, crockery.

Unlike the wear and tear allowance, which only applies to fully furnished property, the new tax deduction can be claimed by any landlord who includes one or more items of furniture or equipment in a property. It will apply to any item which does not become part of the structure of the building. HMRC says it will issue detailed guidance on this, presumably by April 2016.

The renewals allowance will only be given for the cost of replacing an existing item. Where you let a property for the first time on or after 6 April 2016 and buy furniture or equipment for it, you will not be entitled to the allowance. Conversely, if you purchase a replacement item which you have used in a property let before or after 6 April 2016 you can claim the allowance.

When you sell furniture which you replace, the amount of renewals allowance you can claim for the cost of the new item is reduced by the amount you received for the old item and/or any improvement element. Also if you incur capital costs in selling an item, say auctioneer’s charges, these can be added to the cost of the replacement furniture.

This deduction will not be available for furnished holiday lettings as capital allowances continue to be available for them.

Planning point: If you can defer further replacement furniture expenditure until after 5 April 2016 you could potentially have a 100% replacement cost claim in 2016-17 and the wear and tear allowance in 2015-16 will be unaffected.
Mortgage Interest relief
The planned introduction of new legislation will mean that over a period of three years starting on 6 April 2017, higher rate tax relief on loans used by landlords to buy or improve residential properties they let will be phased out. Currently, the highest earning landlords reduce their income tax by £45 for every £100 of mortgage interest paid but from April 2020 a landlord’s tax liability will be reduced by only 20% of the interest.

The change means that all finance costs (not just loan interest) will no longer be an allowable expense when calculating your taxable rental profits and instead you will be required to make a tax return adjustment that will give you a basic rate tax deduction after the rental profits have been taxed. This deduction will be up to 20% of the finance cost.

If you are currently a basic rate taxpayer, you may find that you become a higher rate taxpayer once the finance costs are disallowed in your rental accounts. This depends on your other income and the amount of finance costs that are added back.

If you do become a higher rate taxpayer after arriving at your rental profits, then you will lose higher rate tax relief on your finance costs. The main points that need to be considered are as follows:
  • The increase in rental profits will lead to an increase in your total income for tax purposes.
  • The knock on effect depends on your personal circumstances, other income, capital gains and other reliefs.
  • For anyone claiming tax credits or if you or your partner claim child benefit and the change increases your income above £50,000, child benefit can be clawed back under the Higher Income Child Benefit Charge (HICBC).
  • You could find that you are paying tax at 40% or higher or that capital gains are taxed at 28% instead of 18%.
  • You may be able to reduce your taxable income if you carry back pension contributions or Gift Aid donations from the next tax year.

  • This new legislation does not apply if the property qualifies as a furnished holiday let.

    Planning point: If you want to plan ahead we may be able to anticipate whether you are likely to become a higher rate taxpayer as a result of the adjustments and we can look at any planning opportunities for you.
Rent a Room relief
Homeowners who rent out a room to tourists and lodgers have been given a tax boost.

The Chancellor increased the amount a property owner can earn tax-free in rent to £7,500 a year.

The rent a room tax relief scheme currently allows homeowners who let extra bedrooms in their main residence to lodgers to earn up to £4,250 a year tax free.

But from April 2016 they will now be able to earn £7,500 in rent before paying tax on those earnings.

This extra allowance is worth £1,300 a year to a higher rate taxpayer, and £650 a year to a basic rate taxpayer.
Stamp Duty Land Tax (SDLT)
From 1 April 2016 a stamp duty land tax (SDLT) supplement of 3% will be levied on purchases of second homes and buy-to-let properties. For example, a landlord buying a property for £100,000 will have £3,000 of SDLT to pay when he buys after April 2016, whereas if he bought the same property before 1 April 2016 he would pay no SDLT.

Planning point: Keep a close eye on progress with property purchases and push for completion before the SDLT charge comes in.
Capital Gains Tax within 30 Days
If you are a non-resident individual you must notify HMRC and pay any Capital Gains Tax (CGT) due within 30 days of a disposal of UK property.

From 2019, it is proposed to extend this so that when any individual sells a property at a capital gain, they will be required to pay any CGT within 30 days of the disposal of the residential property. Currently individual landlords have up to 21 months (depending when in the year they sell) after the sale of a property to pay CGT. The Government are still to consult on how this scheme will work in practice.
Should I incorporate my rental business?
In view of the proposed changes to loan interest relief many landlords are asking should I consider incorporating.

There are a number of factors to consider and these include:

  • Holding property in a company can be better than holding it personally as there can be a lower rate of Capital Gains Tax (CGT) when a property is sold. Also, companies can still claim indexation allowance, which allows the cost of a property to be increased in calculating CGT by the same proportion as the increase in the retail prices index over the period the company has owned the property.
  • The new restriction on mortgage interest relief does not apply to property investment companies.
  • Property investment companies can be useful for estate planning. Shares can easily be transferred to the next generation or held in trust. Different classes of shares can often be used so dividends can be directed to whoever needs them at the time.
  • There can be Inheritance Tax (IHT) advantages as minority shareholdings can be discounted in calculating an IHT liability.
  • Many landlords are deterred from incorporating as they hold property that is standing at a substantial capital gain. It might be possible to avoid that gain on incorporation by the use of a special relief that is available when businesses (including buy-to-let and other property businesses) incorporate.
  • Careful thought is needed regarding stamp duty land tax (SDLT) if an existing property held by individual(s) is to be transferred to a company. It might be that this can be mitigated with appropriate planning. Even if there is SDLT to pay on the incorporation the savings on, for example, mortgage interest relief might make the incorporation worthwhile. Landlords need also to be aware of the rules on companies buying a valuable (more than £500,000) residence as SDLT can be as much as 15% for those properties.
  • Historically, many landlords have been put off incorporation because of a potential double hit of tax. The company pays corporation tax on the rents and then the shareholder suffers income tax when cash is extracted from the company. However, the recent changes might make incorporation a more attractive structure for property holding.
  • Landlords need to consider carefully their intention
    • - If the intention is largely to roll up the rents then it could be possible for this to be done more efficiently in a company as it will be done at corporation tax rates rather than income tax rates.
  • Many landlords rely on the rents from their properties to fund their lifestyle. Some number-crunching is needed to compare the net of tax position using a company to staying unincorporated. The new rules on the taxation of dividends effective from 6 April 2016 will also need to be taken into account.

Our view is that, because of the uncertain tax position, if the only reason you are considering transferring your buy-to-let business to a company is to avoid losing higher rate loan interest relief, don’t bother.

If there are other reasons to consider a transfer please speak with us first to avoid the potential for additional and unexpected tax charges.
There can be implications for VAT registered sole traders and partnerships of also owning properties that are let. Typically this can mean complying with the rules for Partial Exemption which complicate the calculation of the figures to be included on your VAT Return. If you think this impacts you please get in touch with us to discuss this or any other property related matters.