The Blog

Tax relief changes for residential landlords: The ins and outs

As of next month (April), the Government’s widely-debated plans to limit residential landlords’ tax relief are set to come into force.

 But what will the changes involve? Will they impact all landlords? And what action, if any, should people be taking right now? David Gillies explores the ins and outs of the new tax changes, which have been the subject of much discussion and debate since they were first announced by the Government last year.

From April 6, 2017, tax relief on interest and finance costs for landlords with residential properties will start to be reduced to the basic rate of Income Tax.

Currently, landlords are entitled to claim the top rate tax relief of up to 45% on residential buy-to-let properties, but that’s all set to dramatically change once the new rules fully kick in, as this figure will be cut to 20%, the base rate of tax.

As a result of the changes, landlords will no longer be able to deduct mortgage interest payments or any other finance-related costs from their turnover before declaring their taxable income. According to the National Landlords’ Association, the plans will also mean a significant proportion of the 440,000 basic rate tax-paying landlords will find themselves winding up in the higher rate tax bracket.

But while April 6 2017 is when we’ll see the Government start to put the wheels in motion for its plans, the full effect of the changes actually won’t be felt right away. That’s because the reduction will be implemented using a phased approach over the next three years, which will see it fully in place from April 6, 2020.

Who will the changes apply to?

UK and non-UK landlords who let residential properties as an individual, or in a partnership or trust will all be impacted, as will trustees or beneficiaries of trusts who are liable for Income Tax on their property’s profits.

For resident companies, both UK and non-UK based, and landlords of furnished holiday lettings, it’ll be business as usual. They don’t fall within the jurisdiction of the new restriction and therefore will still be able to receive relief for interest and other finance costs as they’ve always done.

Which finance costs will be restricted?

 It’s anticipated the restriction will apply to interest on mortgages, loans (including loans to buy furnishings) and overdrafts. Other affected finance costs include:

  • Alternative finance returns
  • Fees and any other incidental costs for getting or repaying mortgages or loans
  • Discounts, premiums and disguised interest

Up until April 6, 2017:

Interest is classed as a deductible expense so, if a landlord’s total expenses exceed their rental income, it creates a loss that can be carried forward and used to reduce taxable rental profit (or increase a loss) later down the line.

From April 6, 2017:

A proportion of the interest (25% for 2017/18, 50% for 2018/19, 75% for 2019/20 and 100% for 2020/21) won’t count as an expense and therefore won’t be able to be taken into account when working out a loss. It can, however, be carried forward and used as credit in later years.

 What should residential landlords be doing now?

While these changes to tax relief for residential landlords may have been widely-talked about from the moment they were unveiled in the summer Budget 2015, there appears to be some uncertainty surrounding them, even now.

For those who haven’t already done so, now’s the time to focus on fully understanding the implications of what’s proposed, planning ahead and developing a clear strategy to address the widespread impact the changes will undoubtedly have once they’re in place. For instance, while residential landlords should already be in the habit of keeping a record of their losses carried forward for their tax returns, they’ll also need to report the amount of interest carried forward for 2017/18 and onwards, as part of the new rules.

The tax relief landscape for residential landlords is set to change beyond all recognition from April 6, but there’s no reason why it shouldn’t be anything but a seamless process for those who’ve done their research and got the right professional support and insight behind them.

Got any questions or want to find out more about how the tax relief changes for residential landlords will impact you? Or perhaps you’d like advice on how to ensure you’re complying with the new rules as they’re phased in? Call us on 01905 777600 or email us at mail@ormerodrutter.co.uk.


DSC4366About the Author

David Gillies specialises in private client tax, advising on personal tax with an emphasis on inheritance tax planning, trusts, tax efficient structuring for property portfolios and residence and domicile status. He has worked for “big 4” firms as well as smaller practices.

 


 

Let Property Campaign brings in £7.9 million in additional landlord tax

HM Revenue and Customs have been targeting UK landlords with the Let Property Campaign since autumn 2013, in part of a series of campaigns in their continued tax avoidance crackdown.

UK Landlords who make an income from residential properties at home or abroad (including holiday homes, specialist landlords and those above the ‘Rent a Room Scheme’ threshold) have been encouraged to disclose any previously undeclared tax under the Let Property Campaign.

The campaign offers more favourable terms to those who make a voluntary disclosure.

In 2014, HMRC reports that around 40,000 landlords who had failed to come forward were sent a letter which gave them 30 days to bring their tax affairs up to date. However, those who made a ‘prompted disclosure’ as a result of these letters were not offered the same favourable terms.

Ignoring the letter risks penalties of up to 100% of the unpaid tax liabilities and up to 200% of offshore related income. HMRC can also conduct an investigation and in certain cases the result may be criminal prosecution.

It is suspected that many buy-to-let landlords with undisclosed rental profit have misunderstood the rules. The most common misconception is that all mortgage repayments can be offset, however only the interest proportion is permitted.

Even if landlord tax is undeclared or under-paid because of an error or misunderstanding, it’s important that they come forward to bring their tax affairs up to date as soon as possible.

It is reported that HMRC have raised £7.9 million in additional tax as a result of the campaign so far.

Many letting agents have also received statutory notices and are legally obligated to give HMRC access to their landlord records. HMRC can also access records held by the Land Registry to detect undeclared income. Their software is getting more sophisticated and the records they can access is increasing.

 

The Let Property Campaign is one of a series of campaigns targeting different sectors and industries, and with an increase in data gathering the message is clear – it’s better to come forward and get your records in order now, rather than trying to hide.

For more information about the penalties that apply, Download our free guide to Landlord Tax Penalties.

 

Landlords with undeclared or under disclosed rental income, who have not yet been contacted by HMRC, are strongly urged to bring their records up to date as soon as possible. Favourable terms and affordable repayment plans can often be negotiated.

If you would like to discuss this further, or you have received a letter from HMRC about the Let Property Campaign, please contact us to speak to Anthony Middleton.

Landlord tax the latest target in tax avoidance crackdown

Landlord tax is the latest target of a HMRC campaign to collect undeclared income, as part of a series of campaigns running since 2007 in their continued tax avoidance crackdown.

HMRC campaigns are aimed at groups of taxpayers where they suspect a higher risk of tax error. Since introducing them in 2007, HMRC have reportedly collected over £596 million in tax from people making voluntary disclosures, and over £338 million from follow up activities.

The legal sector have recently been targeted with the Solicitor’s Tax Campaign, and previous campaigns have been aimed across the full spectrum of businesses and professions, including healthcare and doctors, electricians, plumbers and offshore accounts and assets.

The current Let Property Campaign is an opportunity for landlords to bring their tax affairs up to date and declare previously undisclosed income to the tax authorities under the best possible terms.

If you rent out property in the UK or abroad you may be able to take advantage of the Let Property Campaign to bring your tax affairs up to date.

Find out more by downloading our Let Property Campaign Fact Sheet.

If you are considering making a disclosure, or have received a letter from HMRC regarding the Let Property Campaign, we strongly recommend that you obtain professional advice.

If you are a letting agent who is concerned about how this may affect you or your clients, or you have been approached by HMRC, we can help.

For more information, or for a free initial consultation, please contact us to speak to Anthony Middleton.

HMRC Let Property Campaign

The Let Property Campaign is an opportunity for landlords to come forward and declare previously undisclosed income to the tax authorities.

We are currently seeing more individuals receive a letter from HMRC under the title of the Let Property Campaign.

We recommend that landlords who have undeclared rental income make a voluntary disclosure to the tax authorities using the Let Property Campaign. Lower penalties and payment plans can be negotiated for those who come forward and make what is known as an unprompted disclosure to the tax authorities.

If HMRC have sent you a letter under the heading Let Property Campaign, the disclosure will be classed as prompted and the penalties charged less favourable. Remember, penalties are tax geared, and are based on a percentage of the tax due as a result of the previously undeclared income.

Should the Let property Campaign close without you receiving a letter under the Let property Campaign or you having made an unprompted disclosure, and HMRC later find out about the undeclared income, then penalties will be severe, potentially up to 100% of the tax due and landlords risk being investigated under Code of Practice 8/9 with the possibility of a criminal prosecution.

Landlords should also remember that HMRC have a wealth of information to identify individuals who have not declared rental income. This includes computerised records from other government agencies including the Land Registry, together with the details passed to them by letting agents who have been compelled to pass the names and contact details of registered landlords.

For further information, or to arrange a free initial consultation please telephone Anthony Middleton on 01905 777 600.

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