HMRC has recently released some tax advice for residential Landlords.
They describe it fetchingly as “HMRC’s property income manual at PIM20158” where the reduction is computed using (b) or (c), the difference between that figure and (a) is carried forward to calculate the basic rate reduction in the following year.
Alternatively ESB Accountancy in Gloucestershire provides a more straightforward explanation for residential landlords in Glos.
Although cash accounting was introduced under the banner of simplification, in reality, the existence of two sets of rules creates new choices. Since 2017/18, the cash basis applies by default to landlord clients ‘with straightforward tax affairs’ where the cash basis receipts do not exceed £150,000 and where the landlord has not elected for the accruals basis to apply.
There are certain exclusions from cash basis, which are detailed in HMRC’s Property Income Manual at PIM1092. Note also that where a client has more than one type of property business, (say, a UK business alongside an overseas property business) each business qualifies separately for any election to use accruals accounting.
These would need to be considered client by client. Repairs and renovations
An area that can cause headaches for clients is spending on repairs and renovations. Generally, repairs count as revenue expenditure, deductible if wholly and exclusively for the purposes of the property business, whereas enhancement expenditure is capital expenditure, usually disallowed.
In overview, the basic rules for residential landlords are set out below:
• Capital allowances are not available for residential letting businesses, except for certain cars and assets used in furnished holiday lets.
• Replacement of domestic stand-alone items for a tenant’s use, such as furniture, crockery, furnishings and household appliances can be covered by replacement of domestic items relief (ITTOIA 2005,s. 311A).
This tax relief has a number of restrictions:
• no deduction is given for the initial cost of providing the items, only for the cost of replacements;
• replacements must be ‘like for like’ – any enhancement is excluded from deduction;
• ‘fixtures’ are specifically excluded. This category includes boilers and heating systems and any other items which are fixed ‘in or to a dwelling-house as to become, in law, part of that dwelling-house’ (ITTOIA 2005, s. 311A(14))
• Repair or renovation of fittings may be deductible under case law rules. In a letter to the ICAEW and CIOT in 2014, HMRC confirmed that replacement of sanitary and kitchen units would be a repair. The logic here is that replacing kitchen or bathroom units may be viewed as a ‘repair’ to the house. Examples of the distinction between repairing an asset (allowable) and replacing an entire asset (capital expenditure) are set out in HMRC’s Business Income Manual at BIM46911. Repairs to fixtures can be deductible so long as they are not replacement, alteration or improvement expenses: BIM35430 discusses the principles involved.
• For dilapidations, especially where renovation expenditure is incurred on a newly acquired property
prior to first letting, a key issue is ‘could the asset be used in the business before the expenditure in
question is incurredfi’ This approach is based on the old favourites of Odeon Associated Theatres Ltd v
Jones (1971) 48 TC 257 and Law Shipping Co Ltd v IR Commrs (1923) 12 TC 621.
Strategic planning for residential landlords in Glos
As the final phase of the finance cost restriction kicks in, landlord clients may still need to consider alternative strategies, such as:
• transferring property to a spouse or civil partner paying tax at a lower rate – remembering to factor in land tax considerations;
• squeezing property into the more favourable holiday letting rules;
• making future acquisitions via a company.
Please talk to us at ESB Accountancy to discuss how your business can comply with the new tax, finance and accounting laws – with several decades of financial experience here in Gloucestershire you can either ring us now on – email us on firstname.lastname@example.org or click the Contact Us buttonor please fill the form at the bottom of the contact us page.