Changes to Residential Lettings - Dunkleys Accountants
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Changes to Residential Lettings
Chartered Accountants
& Statutory Auditors
2015’s Autumn Statement announced many significant changes to how residential lettings and second properties will be taxed. As a Landlord it is essential to fully understand these changes and to be aware of their impact. Within this brochure we’ve illustrated precisely how these changes will affect Landlords. For more information on this topic please call us on 01454 619 900 or email our Property Partner lisa.white@dunkleys.accountants. Lisa has over 20 years accountancy experience and throughout her career has worked across numerous sectors. She specialises in working with Landlords, Licensed Conveyancers as well as Estate and Letting Agencies.
What do these changes mean for landlords?
Below is a summary of the new rules introduced in the summer finance bill regarding
finance costs on residential lettings:
• The relief available for finance costs on residential properties will be restricted to
the basic rate of income tax, being introduced gradually from 6 April 2017.
• Landlords will no longer be able to deduct all of their finance costs from their
property income to arrive at their property profits. Instead they will receive a
basic rate reduction from their income tax liability for their finance costs.
• Deductions from property income for finance costs will be restricted to:
75% for 2017/2018
50% for 2018/2019
25% for 2019/2020
0% for 2020/2021 and beyond.
Individuals will be able to claim a basic rate tax reduction from their income tax
liability on the proportion of finance costs not deducted in calculating the profit.
• The table below provides an example for a higher rate tax payer:
Higher rate tax payer 2016-2017 2020-2021
Rent £ 40,000 £40,000
Costs £ (4,000) £ (4,000)
Interest £(30,000) £ (0)
Profit £ 6,000 £36,000
Tax @ 40% £ 2,400 £14,400
Credit for finance cost relief at 20% £ 0 £ 6,000
Liability £ 2,400 £ 8,400
Any excess finance costs may be carried forward to following years if the tax reduction
has been limited to 20% of the profits of the property business in the tax year.
The restriction in interest relief does not apply to companies. Therefore you may
want to consider owning properties through a limited company. However there are a
number of issues you will need to think about carefully before you adopt this strategy.
If you are considering setting up a limited company, our expert team will be happy to
help talk you through all the considerations in a free one hour consultation.
2
Removal of the Wear and Tear allowance
Many businesses receive capital allowances to
recognise the depreciation of equipment used in
the business. However, there are no capital
allowances due for equipment bought for use in
a residential property.
There are exceptions to this rule for example for
property which falls within the definition of a furnished
holiday let.
Since April 2013 where a taxpayer lets a fully furnished
residential property, a deduction could only be claimed for a
wear and tear allowance of 10% of the ‘net rent’ from the
furnished letting, designed to cover the depreciation of equipment.
Furthermore from the same date where a dwelling is let partly
furnished, there are no allowances due at all unless costs are incurred which
can be classified as a repair, at which point relief will be given for the costs. In some
cases, a repair will include the replacement of that item if that item can be regarded
as a ‘fixture’ in the building. Establishing whether expenditure is a repair cost or an
improvement can be complex and is governed by principles established in a number
of tax cases.
From April 2016 the government is proposing to remove the wear and tear allowance.
A new relief will allow all residential landlords (in respect of a fully furnished dwelling
or not) to deduct the actual costs of replacing furnishings provided for the tenant’s use
in the residential property. The initial cost of furnishing a property will not be included.
Capital allowances will continue to apply for landlords of furnished holiday lettings.
What action can be taken to improve the position?
The wear and tear allowance is given whether or not you have replaced any
furnishings. From April 2016 (1 April 2016 for companies) specific relief will be given
for these costs, so it makes sense, if possible, to defer replacement expenditure to
after these dates.
A similar point applies if you let out a property only partly furnished. No relief is given
at the moment for replacing furnishings but relief will be given for such expenditure
from April 2016.
3
Examples of items eligible for new relief for replacement furniture
Under the new replacement furniture relief landlords of all non-furnished holiday let
residential dwelling houses will be able to claim a deduction for the cost of replacing
furniture, furnishings, appliances and kitchenware provided for the tenant’s use in the
dwelling house, such as:
• movable furniture or furnishings, such as beds or suites • curtains
• televisions • linen
• fridges and freezers • crockery or cutlery
• carpets and floor-coverings • beds and other furniture
Examples of ‘fixtures’ which are eligible for relief as repair
expenditure
Fixtures integral to a residential property are not normally removed by the owner if
the property was sold. The replacement cost of these are, and will continue to be, a
deductible expense as a repair to the property itself. Fixtures include items such as:
• baths • boilers
• washbasins • fitted kitchen units. • toilets
Stamp duty land tax
Higher rates of SDLT will be charged on purchases of additional residential properties
(above £40,000), such as buy to let properties and second homes, from April 2016.
The higher rates will be 3 percentage points above the current SDLT rates (current
rates 2% £125,001 to £250,000, 5% £250,001 to £925,000). The increased stamp duty is
deductible as a purchase cost on disposal when calculating any capital gain.
Stamp duty land tax: changes to the filing and payment process
The government will consult in 2016 on changes to the SDLT filing and payment process,
including a reduction in the filing and payment window from 30 days to 14 days. These
changes will come into effect in 2017 to 2018.
Capital Gains Tax: payment window
From April 2019, a payment on account of any CGT due on the disposal of residential
property will be required to be made within 30 days of the completion of the disposal.
This will not affect gains on properties which are not liable for CGT due to Private
Residence Relief. The government will publish draft legislation for consultation in 2016.
4
Furnished Holiday Lets
There are special tax rules for rental income from properties
that qualify as Furnished Holiday Lettings (FHLs).
If you let properties that qualify as FHLs:
• you can claim Capital Gains Tax reliefs for traders
(Business Asset Rollover Relief, Entrepreneurs’
Relief, relief for gifts of business assets and relief for
loans to traders)
• you are entitled to plant and machinery capital allowances
for items such as furniture, equipment and fixtures
• the profits count as earnings for pension purposes
Accommodation that qualifies as a FHL
To qualify as a FHL your property must be:
• in the UK or in the European Economic Area (EEA) - the EEA includes Iceland,
Liechtenstein and Norway
• furnished - there must be sufficient furniture provided for normal occupation and
your visitors must be entitled to use the furniture
The property must be commercially let (you must intend to make a profit). If you let the
property out of season to cover costs but did not make a profit, the letting will still be
treated as commercial.
Occupancy conditions
Accommodation can only qualify as a FHL if it passes all 3 occupancy conditions.
How to use the occupancy conditions
• for a continuing let, apply the tests to the tax year - that is from 6 April one year to
the 5 April the next
• for a new let, apply the tests to the first 12 months from when the letting began
• when your letting stops, apply the tests to the 12 months up to when the letting finished
5
The pattern of occupation condition
If the total of all lettings that exceed 31 continuous days is more than 155 days during the
year, this condition is not met so your property will not be an FHL for that year.
The availability condition
Your property must be available for letting as furnished holiday accommodation letting for at
least 210 days in the year.
Do not count any days when you are staying in the property. HM Revenue and Customs (HMRC)
do not consider the property to be available for letting while you are staying there.
The letting condition
You must let the property commercially as furnished holiday accommodation to the public
for at least 105 days in the year.
Do not count any days when you let the property to friends or relatives at zero or reduced
rates as this is not a commercial let.
Do not count longer-term lets of more than 31 days, unless the 31 days is exceeded because
something unforeseen happens. For example, if the holidaymaker either:
• falls ill or has an accident, and can’t leave on time
• has to extend their holiday due to a delayed flight
If you don’t let your property for at least 105 days, you have 2 options (known as elections)
that can help you reach the occupancy threshold:
• the averaging election - if you have more than one property
• a period of grace election - if your property reaches the occupancy threshold in some
years but not in others
We can have a look at this in more detail if you decide to buy a furnished holiday let.
6
Right to rent
As of January 2016, the Home Office has extended the
Right to Rent scheme across England. This means all
private landlords, including people who sublet or take in
lodgers, will have to check their tenants have the right
to be in the UK before renting a property.
Anyone who rents out private property in England now
needs to see and make a copy of evidence that any
new adult tenant has the right to rent in the UK (for
example a passport or a biometric residence permit).
The checks don’t apply to existing tenancy agreements.
The process is straightforward and many landlords already
make similar checks.
You can find out more about Right to Rent at www.gov.uk/righttorentchecks
Please speak to us on 01454 619 900 or email advice@dunkleys.accountants if you have
any more general questions regarding property income and the changes announced.
Dunkley’s Chartered Accountants
Woodlands Grange, Woodlands Lane,
Bradley Stoke, Bristol, BS32 4JY
Tel: 01454 619 900
advice@dunkleys.accountants
Chartered Accountants
www.dunkleys.accountants & Statutory Auditors
(BTL216/SD)
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