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Chartered Accountants | Business Advisers

Landlord & Tenant Update: Changes that will affect you – Budget 2015

1. Factors to consider

Proven to be a successful investment

Capital appreciation exceeding inflation

Gross return now not as high

Dos Don’ts

Research Self manage (inc. family)

Long term investment Cut corners on documentation

Quality decorating Buy a ‘money pit’

Your sums Forget your tax return

2. Which Property?

• Location – schools/ transport…

• Demand – one bed / three bed

• Agents

• Tenancy Agreements

• ?

3. Tax On Rental Income

• Rents received minus allowable expenses

• However…

• Changes in Summer Budget mean that

mortgage interest will gradually become a non-

allowable expense

• 20% of the disallowed interest will be used as a

tax reducer instead

• Restricted to relief at basic rate of tax (20%)

• Any unused amount will be carried forward to

the next year

BR HR

Rental Income £40,000 £40,000

Expenses (£15,000) (£15,000)

Mortgage Interest

(£10,000) (£10,000)

Taxable Income £15,000 £15,000

Tax to pay £3,000 £6,000

4. Tax Relief Examples 2015/16

5. Tax Relief Examples 2018/19

BR HR

Rental Income £40,000 £40,000

Expenses (£15,000) (£15,000)

Mortgage Interest (£10,000) Only 50% deductible

(£10,000) Only 50% deductible

Taxable Income £20,000 £20,000

Tax £4,000 £8,000

Tax Reducer 20% of £10,000 but only 50% deductible (£1,000)

20% of £10,000 but only 50% deductible (£1,000)

Tax to pay £3,000 £7,000

6. Tax Relief Examples 2020/21

BR HR

Rental Income £40,000 £40,000

Expenses (£15,000) (£15,000)

Taxable Income £25,000 £25,000

Tax £5,000 £10,000

Tax Reducer 20% of £10,000 (£2,000)

20% of £10,000(£2,000)

Tax to pay £3,000 £8,000

7. Tax Relief Examples

2016/17 2017/18

Rental Profits £10,000 £10,000

Mortgage Interest (£6,000) (£4,500) only 75%

Net Income £4,000 £5,500

Higher rate tax 40% £1,600 £2,200

Tax Reducer N/A (£300) 20% of £1,500

Tax to pay £1,600 £1,900

Effective tax rate on the £4,000 profit

40% 47.5%

8. Planning

• Consider other income and those who border higher rates of tax

• High Income Child Benefit Charge (HICBC)

• Higher student loan repayments

• Contemplate restructuring your portfolio e.g.– A company

– Ownership

– Sale

– Debt consolidation

9. Planning

• Transferring rental business into a company:

– Stamp Duty Land Tax (SDLT)

– Capital Gains Tax

– Legal admin

– Mortgages could be more expensive

– Annual Tax on Enveloped Dwellings (ATED)

• Possibly worth it for some, but mostly not!

10. Jointly Owned Property

Where husband and wife co-own HMRC assumes

a 50/50 split – joint tenants

For any other split of income a Form 17 must be

completed – tenants in common

Form 17 is not reversible

Capital gain on property must be split

according to ownership

11. The End of Wear & Tear Allowances• April 2016 – new relief

• 10% calculation (gross rents less council tax & water rates)

• Capital cost of replacements

• Applies to furnished & unfurnished properties

• Improvements relieved on the eventual sale, repairs offset against rental income

• Fitted items integral to the building would be classed as a repair; i.e. baths, toilets, boilers, fitted kitchen units etc.

• Easier than calculating 10% Wear & Tear

• Consider deferring expenditure as no retrospective relief

Refurbishing a kitchen will count as a repair if the

kitchen is of a similar standard to the one it replaces.

If the kitchen is upgraded (i.e. increase in size or

using higher quality materials) then considered

capital in nature.

HMRC will accept the following as repairs: rewiring,

plastering, tiling and replacement of fixed fittings

such as sink and cooker.

Example:

12. Property Expenses Rents, rates, insurance: ground rents & service

charges for leased properties, heating & lighting costs, water rates & council tax etc.

Interest & other finance charges (but restricted from 2017)

Wear & Tear (changing to Replacement Cost)

Property repairs, maintenance (not improvements)

Legal, management & other professional fees: accountancy fees (drawing up property business accounts etc.), letting agents’ fees, advertising for tenants etc.

Costs of services provided, including wages: gardening, cleaning & security services etc. where relevant

Other property expenses: motor expenses for travelling to the property, stationary etc.

Wholly & Exclusively

13. Furnished Holiday Lettings (FHLs)

• Must be available to let for 210 days

• Must be actually let for 105 days

• 105 day rule can be averaged over a number of

properties or skipped for a year or two

• Eventual sale – CGT at 10% under Entrepreneurs’

Relief

• Capital Allowances available as FHLs are classed as

being a business

14. Tax On Sale

Capital Gains Tax at 18% or 28% dependent on

tax bracket

Proceeds minus original cost minus allowable

costs:

– Solicitors’ and estate agents’ fees

– Cost of improvements

– Capital losses

Annual Exemption

Principal Private Residence (PPR) / lettings relief

Paying off mortgage is NOT a tax deduction!

15. Letting the Main Residence

Rent a Room Relief – letting out a room/ rooms

in your main PPR

April 2016 the current rent a room limit of

£4,250 will increase to £7,500

May pull a few people out of Self-Assessment

Tax Returns

Lower tax bills for those earning just above the

allowance

16. Student Lettings

Student purchases property

Rent rooms to other students

Rent a room relief

Parent acts as guarantor on

mortgage

01626 358500

Questions?

Thank you for listening

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Totnes01803

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493394

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