Winter/Spring 2018 –
Trigg & Co “LANDLORD UPDATE”
Welcome to our Landlord Update newsletter, which brings you the latest news and developments affecting landlords letting out residential property.
The good news is that, as a client of Trigg & Co, we automatically take care of all new regulations and requirements that affect the letting, management and collection of rent on your behalf, making your investment safe and trouble free. However, some of the changes in the law do impact on your personal tax affairs and may affect your decision making about acquiring additional property. There is nothing as re-assuring as being properly informed and our aim is make sure you all always fully in the picture.
Minimum energy efficiency standards – April 2018
Tenants can already ask their landlords to carry out certain energy efficiency improvements on their rental properties and Landlords cannot always unreasonably refuse consent.
However, from 1st April 2018, rental properties entering into new lets or renewals will be required to have an Energy Performance Certificate (EPC) rating of E or above. A penalty of up to £4,000 will be imposed for breaches. The regulations will affect all existing tenancies from 1st April 2020 onwards.
Trigg & Co will automatically check whether your property is affected – we will keep you informed and help you to comply with this new law.
Mortgage Interest Relief Changes
The Government announced back in 2015 changes to tax relief for landlords with mortgages, but these didn’t start to be phased in until April 2017. So this will be the first tax year 2017/18 that landlords have been affected and will need to reflect the new rules in their next tax return.
Until April 2017, landlords could claim tax relief on their mortgage interest payments – so they effectively offset the whole cost of their mortgage interest from their rental income. This was a very valuable benefit, especially for higher rate taxpayers.
Mortgage interest tax relief is now gradually being cut back to 20% between 2017 and 2020. The new regime will be fully in place from 6 April 2020.
Like all matter tax related, it IS VERY complicated – unnecessarily so in our view. You’ll still be able to deduct some of your finance costs when you work out your taxable property profits during the transitional period. These deductions will be gradually withdrawn and replaced with a basic rate (currently 20%) tax relief reduction. This means you will be able to deduct 20% of your mortgage interest from your taxable rental profit.
This is effectively ‘no change’ if you are a basic rate taxpayer, but a big increase if you are liable to pay higher rate tax. What’s more, some people could be pushed into higher rate tax if the new profit calculation lifts a basic-rate taxpayer into a higher tax band.
The table below shows how you the transitional arrangements will work.
You will be able to continue to use a percentage of your interest payments when working out the amount of your mortgage interest deduction from your taxable profits (column 2) but will only be able to use a ‘basic rate’ tax relief reduction on the rest (column 3).
HMRC have produced some examples of how the changes work – brace yourself, and find them here:
|Tax year||Percentage of finance costs deductible from rental income||Percentage of basic rate tax reduction|
|2017 to 2018||75%||25%|
|2018 to 2019||50%||50%|
|2019 to 2020||25%||75%|
|2020 to 2021||0%||100%|
Impact on limited companies
Limited companies are not affected by the changes to mortgage interest tax relief. There has been a move by some landlords, especially when buying additional properties, to set up a company to minimise the impact of the new tax regime. However, it’s important to remember that HMRC will treat any transfer of ownership of a property as a sale, so there could be a capital gains tax bill to pay (making expert advice essential for most private landlords).
Your mortgage options might also be more limited because lenders offer a restricted choice of home loans to companies, although some lenders like paragon, are reacting to the changes and bringing out specialist products for landlords using company structures.
A landlord could also transfer ownership of the property to a spouse or partner who is in a lower tax band. But again, there are CGT implications. You also have to be careful that the property ownership does not lift the spouse into a higher tax bracket.
Wear & Tear Allowance – Remember that the rules have changed.
The Government imposed tighter restrictions on the wear and tear allowance from April 2016, so please keep these in mind.
Landlords can no longer be able automatically deduct 10% of their rental profits as notional wear and tear.
You can claim tax relief only on the costs that have actually been incurred, such as if you have bought a new carpet for the property.
You must keep receipts. Prior to April 2016, landlords could write off the 10% even if they had not spent a single penny on repairs or replacements.
Remember that we are here to help.
If you have any questions regarding your rental property please give us a call on 01983 525710 or email us at firstname.lastname@example.org.