The Residential Landlord’s User-Friendly Guide to Tax

Do you let property in Brighton and Hove?  Whether you’re a first-time, “accidental” landlord, renting out two or three properties, or you own an extensive portfolio, understanding your tax situation is vitally important.

You may have an accountant to calculate and submit your tax return, or perhaps you undertake that often-stressful, onerous task yourself.

Whatever your circumstances, it’s worth keeping up to speed with tax changes, and knowing what they are.  They happen on a regular basis, and guess what – there’s very little, if any, wiggle room from HMRC.

Here at Lawton & Dawe, we aim to avoid clichés like the plague…but it really IS true that the only two certainties in life are death and taxes.  And, taxes will happen more than once.  Obviously.

The Taxing Issue of Tax

Although the property rentals sector is buoyant, it’s heavily regulated, and as mentioned, the goal posts move.  Along with your legal, safety-first obligations to your tenants, your financial responsibilities are also changing.  Confused?  No need.  Here’s the latest lowdown on taxes for landlords to keep you on the straight and narrow, including all your need-to-know updates from the March 2020 Budget.

In Brief…

If you as an individual own a property that you let, the first £1,000 of your rental income is tax-free.  Anything higher than that, then HMRC will sit up and take notice.  You have to pay tax on any of the profits you make from your rental income.  That is, what’s left after you deduct any expenses or allowances.

Your allowable expenses could include:

• General property repairs and maintenance
• Letting agents’ fees
• Insurance, including landlord’s insurance
• Vehicle running costs (if relevant to your rental business)
• Water rates, gas and electricity (if included in the rent)

Be Aware

What you can no longer do since 6^th April 2020, is treat your finance costs – for example  mortgage interest – as a business expense.  And, the new legislation covers arrangement fees, too.  The government has been phasing in these changes since 2017 and now it’s done and dusted.  For a while it was all rather confusing, as both the “old” and “new” systems were in force.  However, it’s not all bad news.

You’ll be able to receive a tax credit of 20% of your finance costs, thus reducing your overall tax bill. In practice, you’ll have to declare your rental income then claim back 20%.  This means that your taxable income will rise, especially if you’re a higher earner or an additional rate tax payer.

The impact on you as a landlord?

Well, the government thinks that 82% of you will be unaffected.  How?  Because your overall income won’t go over the higher rate.

Capital Gains Tax, or CGT

As you may know, CGT is paid on the profits you make on the sale of a UK property that isn’t your main home.  In this case, a property (or properties) that you rent to tenants.

The new legislation is important.

Now, you have just 30 days from completion to report the sale to HMRC and to pay any Capital Gains tax that you may owe. This is a big change.  Previously, you could report and pay CGT through your annual self-assessment tax return, meaning that there would, or could have been several months between the sale and the tax you pay on the profits.  Now, it’s all funnelled into a far shorter timeframe.

So, don’t delay or get caught out on this one.  There are penalties and interest if you don’t act quickly.

There are a few exceptions, however: if you sell the property at a loss, or to your spouse or partner the new rules won’t apply.  Also, if a binding contract for the sale was made before 6^th April, 2020.   Be assured that the actual level of tax isn’t changing.  You’ll either stump up 18% (if you’re a basic rate taxpayer) or 28% if you’re a higher rate taxpayer.

Other Important Tax Things

There’s new tax legislation regarding Private Residence Relief that could affect up to half a million landlords.  Is this you?

From 6^th April 2020, if you’ve sold your property further to renting it out whilst living there yourself, you can only claim relief on Capital Gains Tax for up to 9 months after you leave.  Previously an 18 months period, this is quite a development.

If you sell your property having not lived there for 9 months, you’ll still have to pay some form of CGT but this will depend on how long it was your home for.

Finally, lettings relief has changed.  From the start of the 2020/2021 tax year, letting relief will only be available if the homeowner and the tenant are in occupation of the property at the same time.  Previously, this tax relief could be claimed if you sold your property and it had been your home at some point, and which you let out for other periods.

What’s more, this changed is retroactive and will apply to any let periods before 6^th April 2020. Move out of a property you’ve previously rented out and you’ll lose the relief you would have been entitled to before the new legislation.

It’s obvious that when it comes to finance costs and lettings relief there’s a lot to know.  But…Nil Desperandum.

Here at Lawton & Dawe Properties, we make it our business to keep fully up to speed with each and every change and development which could affect your status as a landlord. We also work alongside knowledgeable and established accountants who can help answer any queries you may have. As fully accredited members of ARLA Propertymark, we adhere to their high standards of professionalism and conduct, and we’ be happy to answer any questions you may have.