Five tax rules landlords need to know

Landlord tax rules have seen some significant changes over the last few years. From stamp duty to capital gains tax, there are a number of different rules and reliefs that apply at every stage of the property life cycle.

As landlords it’s incredibly important to keep on top of your tax issues, so here we take a look at some of the major aspects of landlord tax and make sure that you’re up to date.

Stamp duty on second properties
From April 2016, stamp duty land tax (SDLT) on second properties, including rental properties, was increased to include an additional 3% surcharge over and above standard rates.

Anyone purchasing a rental property now pays 3% SDLT for the first £125,000; 5% instead of 2% on the portion between £125,001 and £250,000, and 8% on any amount above £250,001 – increasing the amount of up-front cash landlords need to buy a new property.

Tax on rental income
Until recently, landlords could deduct all finance costs from their rental income and profits were taxed at their marginal rate. However, starting from April 2017 and phased in over a four-year period, tax relief for finance costs is being restricted to a basic rate tax credit.

How these rules will impact you as a landlord will depend on your individual circumstances. However, there are a range of strategies to mitigate the affects of these changes, from resizing your portfolio to moving properties into a limited company – this is where seeking professional advice can be so invaluable.

Wear and tear allowance
Landlords with furnished properties can take advantage of a ‘wear and tear’ allowance to reflect the fact that furnishings need to be replaced regularly. Until recently, the allowance was set at 10% of gross rent but, following a change to the rules, landlords can only deduct the cost of new items against their rental income now.

Insurance premium tax
Landlords can expect to pay 12% insurance premium tax on any insurance they arrange associated with their rental property. While there is no legal requirement for landlords to take out insurance, mortgage lenders usually require specialist building insurance to cover the costs of rebuilding or repairing the structure of the rental property if it is damaged or destroyed by events like fire, storm, flood or vandalism.

Capital gains tax
Landlords are subject to capital gains tax on property sales. The size of the gain is usually the difference between the amount paid for the property and the amount achieved when the property is sold. Landlords can deduct costs associated with buying, selling and improving their property to reduce the gain so it’s important to keep receipts for all these items.

This article is only a brief overview of some taxes that may be applicable to landlords and should not be considered as an exact guide. Before investing in property or looking to restructure an existing portfolio, individuals should always seek expert advice from a qualified tax specialist. If you’re a landlord and would like to discuss your buying options, contact us today.

Are you ready for April’s BTL changes?

After a busy 2017 for landlords, it may come as no surprise to hear that 2018 has more in store for the buy to let sector. As well as the second phase of tax relief reductions coming into force, there are two other new changes heading the way of landlords relating to HMOs and EPC ratings. 

Changes to HMO licensing
From April 2018 many landlords of Houses of Multiple Occupancy (HMOs) will require new licenses. At the moment,some 60,000 HMOs require a license, which may now increase by a further 174,000.

Since 2004, a landlord with a property housing 5 or more unrelated occupants, or with over 3 stories, had to apply for a license from their local authority. This will now apply to all HMOs, and will require a set of minimum standards on room sizes, waste disposal and storage to be met.

Those not prepared could find themselves needing to do work on their property in order to comply. As well as possible fines, Landlords who fail to catch up to the new rules in time may also find themselves with rooms they can no longer rent out.

These new changes could also create an income gap that will put even more pressure on landlords already dealing with several recent financial headwinds. Fortunately, there is likely to be a grace period of six months to adapt to the new rules.

New standards for EPC ratings
As of April 2018 it will be unlawful to let or lease a residential or commercial property that has an Energy Performance Certificate (EPC) rating of F or G. These changes are designed to improve the efficiency of homes in the private rental sector.

Although this will be a requirement of all new lets and renewals of tenancies, it will not be until April 2020 that the rules will apply to all tenancies. Landlords letting out a commercial property, or a house to a tenant, could face fines of up to £5,000 for non-compliance.

Older properties are likely to need the most work to bring them up to standard. Many will lack double glazing and are likely to have solid walls with no cavity for insulation. Landlords can often improve their EPC rating through insulation, boiler replacements, double glazing and cutting out draughts.

Problems may arise if a landlord is letting out a house or flat after April that does not have the required EPC rating of E, which may include renewing a commercial lease. This may cause issues as an EPC survey for the period between Q1 2008 and Q1 2015 showed that 35% of commercial buildings and 26% of domestic properties had a rating of E, F or G.

Would you like to discuss these changes and see what it might mean for your investment plans? Call us today to arrange a meeting and we can work through your options!

Should I Set Up a Limited Company for Buy To Let Properties?

There is not a straightforward answer to this question. It depends on personal circumstances, future intentions and the availability of mortgage finance. You should also be mindful that a Limited Company is required to file accounts of the financial status of the entire portfolio with Companies House on an annual basis.

Transferring existing properties from an individual to a Limited Buy To LetCompany is more complex than purchasing a new property within as Capital Gains Tax would be liable, along with Stamp Duty Land Tax.

The Limited Company needs to be set up correctly by the accountant as lenders will require that the Limited Company is a Special Purchase Vehicle (SPV). This means that all of the companies revenue comes from rental income from residential investment property. The Limited Company must also have the correct SIC (Standard Industrial Classification) codes at Companies House, which describes the nature of the business.

Advantages

Higher Tax Relief- From 2017 to 2020 the amount of Buy To Let tax relief for individual landlords will be progressively cut for top rate tax payers, however, this does not affect Limited Companies. Therefore if you are a top rate tax payer, the tax payable by a Limited Company will be lower than on individual income.

No Tax on Dividends Below £5,000- Until April 2017 the Dividend Tax Credit has been replaced by a tax-free Dividend Allowance of £5,000. This means you could potentially receive tax-free dividend income from your properties.

No Income Tax When Reinvesting Profits on Further Properties- There is no income tax on the retained profit of a company, thus allowing more cash to re-invest. Although corporation tax is payable on trading profits, this is lower that the higher income tax rate.

Personal Funds Can Be Drawn Out of The Company- Any advances made to the Limited Company can be drawn back out as a Directors Loan.

Disadvantages

No CGT Allowance When the Property is Sold- Whereas individuals selling their property would have a £11,100 Capital Gains Tax allowance (2016/2017).

Running Costs of a Limited Company- costs include preparation of accounts company tax and corporation tax, filing at Companies House, legal fees and annual auditing. Accountants may also charge higher fees for a Limited Company.

Higher Mortgage Rates- Most lenders charge higher interest rates and fees for Limited Companies compared to individuals.

Reduced Choice of Mortgage Lenders- Many lenders do not offer mortgages to Limited Companies, and if they do the product range is often smaller.

Bad News for Landlords who are Higher Rate Tax Payers

calcFrom April 2017 the amount that some landlords can claim in tax relief on their finance costs (such as mortgage interest payments, interest on loans to buy furnishings and fees incurred on taking out and repaying mortgages) is being gradually reduced over 4 years.

When the new restrictions are fully in force from the beginning of the 2020/21 tax year, landlords will be only be able to claim tax relief at the basic tax rate of 20%, instead of 40% or 45% for those in higher or top rate income tax brackets respectively

As limited companies are not affected by the tax relief changes, it may be financially beneficial for some landlords to consider creating a Special Purpose Vehicle Limited Company. Of course, it will depend on individual circumstances and landlords considering this option should contact us beforehand.