Five tax challenges for residential landlords
Philip McNeill, Head of Taxation, (Tax practice and small business taxes), ICAS, looks at some tax challenges facing residential landlords.
The 2017-18 tax year will see challenges for unincorporated residential landlords. Some of the changes have already been announced. Others are likely to re-appear shortly.
Interest relief restrictions
Announced in the 2015 Finance Act and redrafted in 2016, these provisions kick in for residential landlords from April 2017.
Tax relief is reduced to 20% (basic rate) on 25% of the costs of a ‘dwelling related loan’ (s272A ITTOIA 2005). Incidental costs of loan finance are included.
The percentage of interest relieved at only basic rate increases 25% per year until, by 2020-21, higher rate relief has gone. Furnished holidays lets and commercial property are excluded.
Higher rates of tax
The way tax relief is restricted can turn basic rate taxpayers into higher rate taxpayers.
First the dwelling-related loan interest is disallowed (that is 25% of the interest in 2017-18 rising to 100% in 2010-21).
Then the taxpayer is allowed a basic rate credit against their tax bill.
The disallowed interest is no longer a deduction from taxable income. So total taxable income goes up, and so, potentially does the tax bill.
Taxpayers could face loss of personal allowance, if the change takes taxable income over £100,000 and High Income Child Benefit Charge if over £50,000.
More generally, someone who is now a basic rate taxpayer could become liable at higher rate. This is particularly likely for the employee with residential buy-to-lets.
Expensive exit strategies
Higher tax costs mean lower yields and some buy-to-let landlords may want to leave the market.
Corporate landlords escape the interest restriction, as do commercial (non-residential) property lets and Furnished Holiday lets. But putting property income into a company, or even selling it, could mean significant Capital Gains Tax (CGT) bills. Bespoke solutions are needed.
Watch out also for the higher, 28%, CGT rate for residential property.
Default cash accounting
Missing from the wash-up Finance Act, but likely to be brought back: cash basis accounting by default, for the unincorporated landlord with gross income of up to £150,000.
But cash accounting won’t suit everyone. Do you need to opt-out? Think about treatment of deposits, capital expenses, and loan-to-property value interest restriction rules in schedule 5 of the Finance Bill 2017.
Unincorporated landlords with turnover of £10,000 or more are due to make quarterly updates and keep digital records.
The current timetable is for those with gross income over the VAT threshold to be in from April 2018, with the remainder joining in April 2019. With rental income on a 5 April year-end, landlords could be among the first to join.
remainder joining in April 2019. With rental income on a 5 April year-end, landlords could be among the first to join.