Landlord Advice: Briefing note for landlords from Mercer & Hole Chartered Accountants
Despite an increasing set of tax and regulatory hurdles, buy-to-let has to date remained buoyant; according to the Council of Mortgage Lenders, around 250,000 new mortgages were taken out on buy-to-let properties in both 2015 and 2016. The total value of mortgages for buy-to-let came to £900m in the month of October 2016 alone.
Yet in the face of the higher rate stamp duty levy, the removal of interest rate relief and stricter Prudential Regulatory Authority (PRA) affordability checks, the environment has become altogether tougher to negotiate and the CML is predicting a fall in transactions in 2017 and 2018.
We consider below some of the tax issues that will affect landlords:
Interest relief restriction
With restrictions on pension contributions and interest rates very low many people have looked to buy-to-let properties as a way to save for the future and maybe even generate some additional income. Generally, income tax is payable on the rents received after deducting allowable expenses.
The immediate problem is that tax relief on interest on borrowings to fund residential lettings is about to be restricted. The restriction is being phased in from 6 April 2017 over four years as follows:
2017/18 - relief at higher rates will be limited to 75% of the cost. The remaining 25% of interest costs will be relieved at only at the basic rate of tax;
2018/19 - 50% of the interest cost will receive only basic rate tax relief;
2019/20 - 75% of cost will receive only basic rate relief;
2020/21 - basic rate relief only on total interest cost.
HMRC has also confirmed a restriction on interest relief where the loan is higher than property value. Some people may well be minded to sell their let property to avoid an uneconomic position. However, too many properties going on to the market in the same time period could impact on value.
Capital gains tax
Another problem is that capital gains tax (CGT) payable on the gain arising on the eventual sale of the residential property will be charged at 28%, as compared to a 20% rate on other assets.
If, however, the landlord still wants to sell it would be sensible (from a tax perspective at least) not to leave it too long as from 2019 the payment date for CGT on the disposal of residential property will be brought forward to 30 days after completion. This is not long for people to contact their advisers, get a calculation of the gain and deal with the tax payment.
The new accounting requirements for properties held in LLP's could impose a revaluation of properties. There is a tax consequence of this in that there is potentially a chargeable gain on changes in profit sharing ratios between the partners.
Quarterly reporting for landlords
The implications for landlords of the proposals under the Making Tax Digital initiative cannot be ignored. Under Making Tax Digital the government and HMRC are embarking on an ambitious programme to transform the UK tax system. Where gross rental income exceeds a limit, £85,000 from April 2018 and £10,000 from April 2019, landlords will need to maintain digital records for their property business and make quarterly and final returns based on these via their personal digital account.
The quarterly returns will need to include each property address and provide details of income and expenses. HMRC has agreed that spreadsheets will be sufficient to comply with this requirement although they will need to be linked to software to permit digital reporting. The requirement for a year end return will also remain, albeit potentially in a different format and via the digital account.
However, despite the quarterly reporting requirements the existing requirements on record keeping (invoices, receipts and cash records) will not change. This is likely to mean an investment in software as landlords will have to report on property income on a different basis to now and additional returns will be required in a short timescale.
The current reporting deadlines proposed for Making Tax Digital are short:
• For quarterly returns - one month;
• For year end – ten months from the period end or 31 January, as now whichever is earlier.
There are additionally proposed new penalties for late returns and increased interest on late payments. HMRC has given no update on its thoughts on this.
The new rules on stamp duty land tax (SDLT) on second residential properties and the proposals in the Autumn Statement on tenants' paying fees are additional obstacles for landlords.
HMRC is also looking at extending the availability of the cash basis of accounting to landlords. In fact it appears it will be automatic unless landlords opt out from April this year. In HMRC’s opinion, the cash basis is a natural fit for Making Tax Digital; reporting and tax calculating are (theoretically) easier. The cash basis does not, at the moment in any event, appear to change what is or is not allowable.
All of this will put additional pressure on landlords with regard to compliance and cash¬ flow.
One possible answer from a tax perspective may be to incorporate and remove the restrictions on interest deductibility and delay the impact of Making Tax Digital for a couple of years. The company should have a lower initial liability but there will be additional costs on tax extraction whether by way of remuneration or dividends and significant costs on final closure.
In any event there are likely to be costs on incorporation, possibly SDLT and, unless HMRC agree that the property letting activity is a business, a charge to CGT on any accumulated growth in value of the properties. However, if these issues can be overcome then incorporation is a possibility going forward.
If you would like to gain further knowledge about how proposed tax changes are likely to affect your investment then please contact"
firstname.lastname@example.org or email@example.com
Mercer & Hole Chartered Accountants