As UK landlords will be aware, the business of letting a residential property is not always the lucrative, ‘zero hassle’, money-maker that some tabloids would have you believe. Rent arrears, damage to property and annual tax returns are just a few of the challenges faced by this important sector in the UK housing market.
In truth, UK residential landlords have some justification for feeling a little picked on over the last few years, particularly regarding the taxation of their activities. The Government has made several changes to the rules for landlords and invariably these have served to increase their tax burden, summarised in their simplest form:
Increase in the Stamp Duty Land Tax rate on second properties
For contracts exchanged after 26 November 2015 and where the property is being purchased counts as a ‘second property’ for the purchaser, the Stamp Duty Land Tax rate payable on the transaction is uplifted by three per cent.
Withdrawal of the Wear and Tear allowance
The Wear and Tear allowance was available to landlords of furnished residential property to take account of the annual wear and tear on the furnishings. The allowance was given as a deduction from rental profits of, broadly, 10 per cent of the income from the property.
From April 2016, the Wear and Tear allowance was abolished and landlords now claim for the cost of renewing the furniture. Although this sounds like a ‘fairer’ system, it means more record keeping for the landlord and peaks and troughs in the profit of the rental business – larger amounts of expenditure will fall into isolated tax years, straining the cash flow of the business.
No drop in the capital gains tax rate for residential property
From April 2016, the main rates of capital gains tax were dropped from 18 per cent or 28 per cent to 10 per cent or 20 per cent. However, the rates for gains made on the disposal of residential property remained at 18 per cent or 28 per cent.
Reduced allowance for mortgage interest
From April 2017, mortgage interest paid on a let property will not simply be deducted from the rental profits. Instead, a basic rate tax credit (20 per cent of the interest incurred) will be allowed from April 2020, with transitional rules applying for 2017/18, 2018/19 and 2019/20.
Introduction of Making Tax Digital (MTD)
From April 2018, landlords with rental income in excess of £85,000 will need to prepare and submit quarterly reports to HMRC.
From April 2019, landlords with rental income in excess of £10,000 will need to prepare and submit quarterly reports to HMRC.
From April 2020, landlords with properties held in limited companies will need to prepare and submit quarterly reports to HMRC.
Increased tax burden
When considered together, the changes summarised above have increased the tax and administrative burden on landlords, quite considerably, in some cases.
What can landlords do?
The most important step for a landlord to take is to form a relationship with a tax advisor that is experienced in the buy-to-let market. As a minimum service, the advisor can ensure the landlord is up to date with the tax rules and ensure accurate information is being submitted to HMRC. A good tax advisor will be constantly reviewing their client portfolios for strategies to reduce the tax burden falling on their client.
If you would like more information on the strategies that can be used to save tax on property income, please contact us or to find out more about our wide range of property tax and compliance services, please click here.