Personal Landlords: The Tax Issues

A few years ago, a raft of tax changes were announced that really increased the tax
liabilities of individual landlords who rented out residential property.
The capital gains tax payable was increased when the landlord sells a residential
property (8% higher). A stamp duty land tax surcharge of 3% was also introduced
on acquisition of such a property. Higher rate income tax relief for buy to let loan
interest has now been removed. These were big tax changes which have hit
personal landlords hard!

Buy to let loan interest
Higher rate tax relief for buy to let loan interest has been gradually removed over a
transitional period.
P&L deduction of
interest
Tax reducer @ 20%
2016–17 100% 0%
2017–18 75% 25%
2018–19 50% 50%
2019–20 25% 75%
2020–21 0% 100%
Landlords now only receive a basic rate tax credit, to reduce their income tax bill,
relating to the buy to let loan interest that they have paid within a particular fiscal
year.

How the landlords’ tax reduction is calculated
The reduction is the income tax basic rate value (currently 20%) of the lower of:
•finance costs not deducted from the rental income in the fiscal year plus any
unrelieved finance costs brought forward;
•property business profits – the profits of the property business in the fiscal year
(after deducting any brought forward losses);
•adjusted total income – the income (after losses and reliefs, and excluding savings
and dividends income) that exceeds the landlord’s personal income tax allowance.
The tax reduction is not allowed to be used to create a tax repayment.
If the basic rate tax reduction is calculated using the ‘property business profits’ or
‘adjusted total income’ then the difference between that figure and ‘finance costs’
is allowed to be carried forward to calculate the basic rate tax reduction in the
following fiscal years.

Replacement expenditure for personal landlords
Landlords can now only claim tax relief when they replace furniture, furnishings,
and kitchenware, provided for the tenant’s use in the property.
This tax relief covers the replacement costs of items such as chairs, beds,
wardrobes, sofas, other furniture, TVs, white goods, curtains, and carpets.
A deduction is only available for the replacement cost, not the cost of the initial
purchase.

Example
Bob lets out a fully furnished home. The rent is £1,500 a month. The tenants meet
the cost of utility bills and council tax. Bob plans to replace the sofa, an armchair,
curtains, a freezer and a washing machine in the near future. He anticipates that
the replacements will cost £2,900.
He will be able to claim a deduction of £2,900 for the actual cost of the above
replacements under this relief. Tax relief is given on the cost of the replacement
item, plus the cost of disposing of the old item, less any sum received when the old
item is sold. The replacement asset must be substantially the same as the item it is
replacing. It must be capital expenditure incurred wholly and exclusively for the
purposes of the property business.
If the new item is an improvement:

Example
The landlord replaces a sofa with a sofabed. He can only claim a deduction for the
cost of buying an item the same as the original, i.e. a replacement new sofa costs
£500 but a sofabed costs £650. He can only claim relief for £500. A new item will
be termed as an improvement when it is not the same as the old item, or its
functionality has changed, or you upgrade the quality of the item. However, if the
replacement is a reasonable modern equivalent, then the full cost of the
replacement will be allowable.

Questions the accountant should ask the landlord
•Was there something similar there before, so that he has replaced it? Ideally he
has taken pictures of the item.
•If Fred (a landlord) sells his rental flat to Tom (another landlord), some planning
could be done in this situation. You could ensure that Fred leaves all the ageing
items behind that he doesn’t want, so that Tom can replace them (see the example
below). Similar planning and procedures can be undertaken when you are about to
leave and let out your old home.

Example
Alan completed the sale of his rental flat to Fred on 22 September 2023. Alan, as
part of the deal (included in the acquisition price) left behind the wardrobes,
curtains, carpets, sofas, TV and kitchenware. Alan reported his capital gain on the
flat to HMRC within 60 days of completion.
Fred prepared a careful and detailed schedule of all the above furniture,
furnishings and kitchenware that he had acquired. He also took photos of all the
above items. When he replaces each of the above items, he will be able to claim
the expense of the replacement costs in his taxable rental profit income tax
calculations.

Stamp duty land tax (SDLT)
When an individual acquires their home, unless they are a first time buyer, these
are currently the rates of stamp duty chargeable on their purchase price.

Normal mainstream SDLT rates re purchasing residential property
Property cost SDLT rate
Up to £250,000 Zero
£250,001 to £925,000 5%
£925,001 to £1.5m 10%
Over £1.5m 12%
However, if they are a landlord, acquiring a residential property to let out, they will
pay a 3% surcharge on each band of SDLT.

SDLT relating to the purchase of a rental residential property or second home
Property cost SDLT rate
Up to £250,000 3%
£250,001 to £925,000 8%
£925,001 to £1.5m 13%
Over £1.5m 15%
There are also surcharges in Scotland and Wales under their own equivalents of the
SDLT regime, albeit at different rates. If the landlord acquiring such a property is a
non-UK tax resident, there will be an additional 2% SDLT surcharge.

The 60-Day CGT pay and file regime for landlords
When an individual landlord sells a house or flat that they have been renting out,
and makes a chargeable capital gain on which CGT is payable, the gain has to be
duly reported to HMRC, and the CGT paid within 60 days from the date of
completion of sale of the relevant property.
This is a considerable burden for landlords who sell rented residential property
during the fiscal year. They will have to remember to promptly notify their
accountant or tax adviser regarding the disposal, and the gain will have to be
calculated, reported to HMRC on the ‘Capital Gains Tax on UK property return’, and
the CGT duly paid within 60 days of completion.

Conclusion
The increased tax burden, difficulty to evict tenants and possible future ecoupgrades
have all contributed to make these very difficult times for personal
landlords. Accountants and tax advisers must ensure that the landlords meet their
tax reporting obligations within the required reporting timescale and correctly
claim the tax relief for the allowed expenditure.

Useful links
Links to commentary, legislation and other resources concerning property
development can be accessed via this Quick link.
If you have any comments on this article, please e-mail the editorial team at taxweekly@croneri.co.uk.
Document downloaded on 29-08-2023 from Croner-i Navigate, the UK’s leading
online research service for tax, audit and accounting professionals. Find out more
at www.croneri.co.uk or call 0800 231 5199.