ESB Accountancy reminds Residential Landlords of their tax situation in Glos, Gloucestershire
As we head towards a new tax year, advisers might want to initiate conversations with residential landlord clients on a range of topics with the potential to sway tax bills. These include the annal phase
of the restriction for finance costs and, given that opt out is on an annual basis, a review of the use of the simplified cash basis for unincorporated property businesses.
Replacement of domestic items and fixtures is also worth consideration.
Since April 2017, tax relief on finance costs for landlords of residential properties has been steadily restricted. From 6 April 2020, the restriction is fully in place.
Which costs? – Restricted finance costs include:
• interest on mortgages;
• loans – including loans to buy furnishings; and
Other costs affected are alternative finance returns, fees and other incidental costs for getting or repaying mortgages and loans, discounts, premiums and disguised interest.
For clients who have a mixed property portfolio, note that where there is an element of duality in the borrowing – say a loan for residential and commercial property together – the legislation does not set out how apportionment should be made; only that it should be ‘on a just and reasonable basis’.
HMRC state in their Property Income Manual at PIM2056 that ‘It is necessary to consider the purpose of the borrowing – the use made of the funds – during the period when the interest accrues’.
Only the element attributable to the residential property business is restricted – the restriction does not apply for loans to buy commercial property.
HMRC’s Property Income Manual then sets out possible approaches for making an apportionment. These include, for example, using the ratio of relevant floor area in a building with both residential and office accommodation.
Where office space is converted to a residential unit, in tandem with an upgrade of other office space, it is suggested that multiplying the mortgage interest cost by the amount spent on the residential flat, as a proportion of the total loan taken out for all the upgrading work, might be appropriate.
The changes to the way in which relief for finance costs is given restrict tax relief on residential property finance costs to a basic rate tax credit. Rather than taking finance costs into account before profit is computed, the income tax liability is computed on profits before deducting finance costs and reducing that liability by a basic rate ‘tax reduction’ (calculated by multiplying the finance costs by the basic rate of tax of 20%).
The change affects:
• UK resident individuals letting out residential property in the UK or overseas;
• non-UK resident individuals letting out residential property in the UK;
• individuals letting such property in partnership; and • trustees or beneficiaries of trusts liable for income tax on property profits.
However, it does not impact on:
• UK resident companies;
• non-UK resident companies;
• landlords of furnished holiday lets.
Not only does this impact the way clients get relief for interest and other finance costs, since it also changes the way taxable income is calculated, there can be other knock-on implications, such as pushing income above the High Income Child Benefit Charge £50,000 threshold, for example.
HMRC estimate that 82% of landlords won’t be faced with larger tax bills because of the change. Others,
however, may be pushed into higher tax bands. For Scottish taxpayers, the impact can be felt at lower income levels, with the changes potentially pushing a basic rate
taxpayer into the Scottish intermediate rate.
Working it out: overview
The reduction is the basic rate value of the lower of:
(a) finance costs – costs not deducted from rental income in the tax year (this will be a proportion of finance costs for the transitional years) plus any finance costs brought forward;
(b) property business profits – the profits of the property business in the tax year (after using any brought forward losses)
(c) adjusted total income – income (after losses and reliefs, and excluding savings and dividends income) that exceeds the personal allowance.
Please talk to us at ESB Accountancy to discuss how your business can comply with the new 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.