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Landlord tax guide for the tax year 20/21
Landlords face yet more taxation changes this tax year, with the phasing out of mortgage interest tax relief reaching its final stage and capital gains tax receiving a number of tweaks.
The rules which came into force at the start of this tax year could have a significant effect on the tax burdens facing property investors. Here, we explain the changes that landlords need to be aware of in the 2020/21 tax year.
Mortgage interest tax relief changes for the 2020-21 tax year
Landlords will only be able to offset 20% of their mortgage interest payments when filing their tax returns. The change marks the final chapter in the government’s tapering off of mortgage interest tax relief. From 6 April 2017, individuals allowed to deduct 75% of their borrowing costs, including interest, incurred in running their lettings business. The percentage of allowed interest reduced by 25% every year until 6 April 2020, after which point all interest paid by an individual landlord will be disallowed. Instead, they will receive a tax credit equivalent to 20% of the disallowed interest to offset against their income tax liability. The policy has been very unpopular with landlords since its inception, and many investors have cited significantly higher tax bills as a primary reason to reduce their portfolios or sell up entirely. Contact Phillips & Co Accountants Chester to find out more about how the changes could affect you.
Capital Gains Tax
The 2020/21 tax year also brings a significant change to how capital gains tax (CGT) is paid. You’ll usually need to pay CGT if you make a profit when selling an investment property, but how much you’ll pay depends on the size of the profit and your financial circumstances. Until now, landlords have been able to declare any CGT liabilities in their next annual tax return, potentially giving them well over a year to pay the bill. From April 2020, however, landlords must declare and pay any CGT liabilities using the government’s new online service within 30 days of selling the property.
The government is also tweaking the rules around private residence relief and letting relief on CGT bills. These two deductibles are only available to landlords who once lived in the investment property themselves, so they won’t apply to a large proportion of buy-to-let landlords:
Private residence relief
If you once lived in your investment property, you wouldn’t need to pay CGT for the years you lived there when you come to sell. From the tax year 20/21 you will also be exempt from CGT for the final 9 months you owned the property, even if you didn’t live there yourself. This is down from 18 months in the previous tax year.
Landlords could also benefit from CGT relief of up to £40,000 when selling an investment property that was once their home – even if they hadn’t lived in it for many years. Under the new rules, however, investors will need to live in the property themselves when they come to sell it. This change effectively removes letting relief as a deductible for the vast majority of landlords when filing their CGT returns.
How will the changes to tax relief affect you?
Highly geared investors could find they are paying tax on non-existent profits but there are some actions that might be taken to offset this.
For married couples and those in a civil partnership, joint ownership becomes particularly attractive if one of the owners is not fully utilising their personal allowance and basic rate income tax band.
For those already affected, if additional properties are acquired, it might be more tax efficient to buy them in a company.
A number of property investors are taking advantage of the fact that the interest relief restrictions do not apply to furnished holiday lettings. To qualify, properties must be available for letting for at least 210 days and actually let for 105 days but no more than 31 days to the same occupants in a tax year.
How will this affect you if you own the property through a company?
The restriction of the deductibility of finance costs will not apply to corporate landlords. A company can continue to deduct all the interest and finance costs in calculating the taxable profits of its property investment business. However, a company may find it has to pay a higher rate of interest or have more difficulty securing mortgages on its rental properties. Lenders could insist that the directors of the company provide personal guarantees before advancing loans to the company.
The advantages of investing in property through a limited company largely depend on how long you intend to hold the property for.
If your aim is to eventually leave your property to your children then holding properties in a company could be tax advantageous, especially regarding inheritance tax.
When do I need to file my tax return?
The changes we’ve described above come into force for the 2020-21 tax year, for which the self-assessment tax return deadline is 31 January 2022. The next tax return you’ll file will be for the 2019-20 tax year. The deadline for paper returns is 31 October 2020 and for online returns, it’s 31 January 2021.
Help for landlords during the coronavirus outbreak
It’s a difficult time to be a landlord, and the outbreak of coronavirus has brought about new challenges. Landlords whose tenants face financial hardship can apply for a three-month mortgage payment holiday. The government says this break should be passed on to tenants in the form of rent deferrals, and that both parties should then work together to arrange a repayment plan for any arrears. If you were thinking of growing or cutting down your portfolio this year, this too will have been affected by the outbreak. But with the property market essentially on hold, now could be a good time to assess your options and consider your long-term strategy. Please see below for a more detailed Covid-19 guide for landlords and tenants from Phillips & Co – Accountants Chester.
Covid-19 guidance for landlords and tenants
Measures to support landlords and tenants through these worrying times
Statutory self-employment pay scheme
General property landlords are unable to claim under the COVID-19 Statutory self-employment pay scheme in respect of lost rental income: rental income is investment income and not trading.
Conversely, Furnished Holiday Letting (FHL) is treated as a trading activity for Income Tax, Corporation Tax and Capital Gains Tax (CGT) purposes.
- Where an FHL business involves the provision of extra services, it may be reporting its profits as a trade and have used the self-employed pages of the Self Assessment return or partnership return. In the case where a holiday trade exists, it will be possible to claim relief under the Self-Employed Income Support Scheme (SEISS).
- Smaller FHLs who report their profits in the Land and Property section of the return are unable to make a claim under the SEISS.
FHLs may well not meet the required occupancy conditions for the 2020/21 tax year, in which case the period of grace rules will provide relief.
Deferral of Income Tax payments
Landlords who pay Income Tax under Self Assessment can delay making their second payment on account for 2019-20, which is usually due by 31 July 2020.
Landlords choosing to delay payment will have up to 31 January 2021 to pay.
CGT: Soft landing on penalties under a new 30-day reporting regime
HMRC have announced that they will not charge any penalties for failure to report Capital Gains on UK residential property within the new 30-day deadline until after July 2020.
Coronavirus Job Retention Scheme
Large landlords may need to lay off some of their maintenance staff or directors during the crisis if social distancing is too difficult to achieve.
Landlords who are employers may claim a grant of up to 80% of the salaries of employees, subject to a cap of £2,500 per month, instead of making them redundant, due to the adverse effects of the coronavirus.
A sole director company landlord may furlough the director in respect of their employment duties.
Ban on evictions
*UPDATE 08/01/2021 – Eviction ban in England extended for six weeks to 21 February 2021.*
Private or social accommodationLandlords will not be able to start proceedings to evict tenants for at least a five-month period during the current emergency (extended from 3 months on 5/6/2020 and 5 months on ).
Landlords whose tenants are experiencing financial difficulties due to Coronavirus will receive a six-month mortgage payment holiday (extended from 3 months on 5/6/2020).
At the end of this period, landlords and tenants will be expected to work together to establish an affordable repayment plan, taking into account tenants’ individual circumstances.
From 21 August until at least March 2021 landlords must give renters a notice period of at least 6 months. The exception to this is where there is anti-social behaviour and in cases of domestic abuse.
The Coronavirus Bill provides that no business will be forced out of their premises if they miss a rent payment in the six months to 30 September 2020. On 16 September 2020 the government announced an extension to the ban on evictions of commercial tenants to 31 December 2020.
All commercial tenants in England, Wales and Northern Ireland are eligible.
Business taxes: Time to Pay
All businesses and self-employed people in financial distress, and with outstanding tax liabilities, may be eligible to receive support with their tax affairs through HMRC’s Time To Pay service.
These arrangements are agreed on a case-by-case basis and are tailored to individual circumstances and liabilities.
It is essential to contact HMRC and make a Time To Pay agreement before the tax debt becomes due.
Empty property and business rates relief
Under the government’s existing rates relief policy, landlords do not have to pay business rates on empty buildings for three months.
The Expanded Retail Discount scheme gives local authorities discretion to allow a business rate holiday to retail, hospitality, leisure and child nursery businesses.
Making Tax Digital for Income Tax
It was originally proposed that this new tax accounting system would commence in April 2020.
It is now postponed until at least 2021. In the meantime, HMRC’s MTD for Income Tax pilot scheme is up and running and this may be an ideal time to try it out and get your systems in place.