Considering selling your buy-to-let property? The late filing penalties for delaying to notify HMRC are no longer paused, read the latest here.

Capital gains tax implications of selling the buy-to-let

There may come a time when a landlord no longer wants to hold a buy-to let property and puts the property on the market. When selling an investment property, such as a buy-to-let, it is important to be aware of the capital gains tax implications, and also the changes that came into effect from 6 April 2020.

Any private residence relief?

If the property had been occupied as a main residence for some of the period of ownership, some private residence relief will be available. The gain will be sheltered to the extent that it relates to the period where the property was occupied as a main residence and also for the final period. From 6 April 2020 this is the last nine months of ownership (reduced from 18 months prior to that date).

Curtailment of lettings relief

Where the disposal takes place on or after 6 April 2020, lettings relief is only available where the landlord occupies the property with the tenant (for example, by letting out a number of rooms in the landlord’s main residence).

The previous, more generous rules, do not apply where disposal is on or after 6 April 2020 even if the property was let out prior to that date and would have qualified for lettings relief under the old rules – it is the date of disposal that is relevant in determining which rules apply, not the period for which the property was let.

No gain, no loss transfers

The capital gains tax rules allow assets to be transferred between spouses and civil partners at a value which gives rise to neither a gain nor a loss. This can be very useful in mitigating the capital gains tax liability, particularly where a spouse or civil partner has not used their annual exempt amount or pays tax at a lower marginal rate. The optimal ownership shares will depend on individual circumstances. It is prudent to review how the property is owned prior to sale.

Paying tax at the residential property rates

Capital gains tax is charged at a higher rate on residential property gains. The rate of tax is 18% to the extent that income and gains fall within the basic rate band, and at 28% thereafter.

Notifying residential property gains and paying tax on account

From 6 April 2020, chargeable gains on residential property must be notified to HMRC within 30 days of the date of completion. The gain can be notified online. Capital gains tax due on the gain must be paid within the same time frame. A return is only required where a gain arises; no return is needed if the property is sold at a loss.

HMRC have confirmed that due to coronavirus, they will not charge a penalty for transactions completed on or after 6 April and 1 July reported up to 31 July 2020 which are reported outside the 30-day window. However, a late filing penalty will be charged for transactions which are completed on or after 1 July 2020 if these are not reported within 30 days.

Interest is charged where tax is paid late. This applies where the completion date is on or after 6 April 2020 – there is no relaxation in respect of Coronavirus.

In working out the capital gains tax on residential property gains, the annual exempt amount can be taken into account, as can any allowable losses brought forward or realised prior to the disposal. However, losses arising after the disposal cannot be taken into account, even if these are realised in the 30-day window for filing the return and making the payment on account.

The taxpayers overall capital gains tax position for the year is finalised when filing the self-assessment return.

Partner note: TCGA 1992, ss. 1H, 1I, 222, 223, Sch. 1B; FA 2019, Sch. 2, Finance Bill 2019—21, Cl. 24.

 

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Have you reduced your rent or let family and friends stay in one of your properties during the pandemic? Unfortunately, HMRC’s view of this is not so generous as you’re unlikely to be able to deduct expenses during that period.

Tax implications of uncommercial lets

There are various circumstances in which a landlord may let a property at rate which is below the current market rate or, indeed, allow the property to be used rent-free. For example, during the Covid-19 pandemic, landlords may have agreed a reduced rent with tenants who are struggling financially and are unable to meet the normal rental payments in a bid to help them out and on the basis that some rent is better than none. Where a landlord has properties that would otherwise be empty, these may have been occupied by family and friends either at a low rent or rent-free.

When reaching the decision to allow the property to be occupied rent-free or at a rate below the market rate, the impact on the deductibility of expenses was probably overlooked.

Restriction on relief

While the landlords motives might have been philanthropic, unfortunately this approach is not shared by HMRC when it comes to allowing a deduction for expenses incurred in a period when the property when not let at a commercial rent.

For expenses to be deductible in computing the profits of the property rental business, those expenses must have been incurred wholly and exclusively for the purposes of the property rental business. HMRC take the view that if the landlord does not charge the full market rent or impose normal market lease conditions, it is unlikely that this test is met. A strict interpretation would mean that expenses could not be deducted.

Deductions capped at level of rental income

Where a property is let for a rent which is less than the market rent that the landlord could obtain, HMRC permit expenses to be deducted up to the level of the rental income received. It is therefore not possible to create a loss in relation to an uncommercial let. Where the expenses exceed the rental income, no relief is given for the excess expenses – they cannot be carried forward to the following year, even if the property is let at a commercial rate in that year. No deduction is permitted for expenses relating to a period when the property is occupied either by the landlord or by family or friends rent-free.

Where the period for which the property is let at an uncommercial rate is temporary, if possible, delay significant expenditure to a future period when the property is let commercially so that full relief for the expenditure can be obtained.

House sitting

In the situation where a friend or relative house sits while a property is empty, expenses incurred in that period can be deducted if the property genuinely remains available for commercial letting and the landlord is actively seeking a tenant. HMRC guidelines suggest relief will not be lost if a relative house sits for one month over a three-year period.

However, no deduction is available for expenses incurred while a property is occupied rent-free by a friend or relative who is essentially using the property to take a holiday. Where a holiday home is let commercially for some of the time and used rent-free by the landlord or by his or her friends or relatives some of the time, the expenses should be apportioned between the commercial and uncommercial use. Expenses related to the commercial use can be deducted in excess of the rent for commercial lets; however, expenses apportioned to uncommercial use can only be deducted up to the level of the rent received, if any.

Partner note: HMRC’s Property Income Manual at PIM2130

 

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If you run a property business which has had empty properties during the coronavirus pandemic you might be wondering if your business is classed as ‘paused’ or ‘ceased’. We explain how to determine which applies to you.

Empty properties – does this mean the end of the property rental business?

During the Covid-19 pandemic, landlords may have periods when their properties have been empty. Landlords letting furnished holiday lettings were particularly badly affected due the restrictions imposed during the lockdown period, as letting of holiday homes was prohibited between 23 March 2020 and 3 July 2020. Home moves were also put on hold at the start of the lockdown.

How long can a property remain empty before the property rental business is regarded as ceasing?

Temporary pause or permanent cessation

In the life of a property rental business, rental business activities may stop and, after an interval, start again. A prime example of this during the Covid-19 pandemic when some lets may be have empty for a period, before being let again as restrictions eased.

The question as to whether the business has been paused or has ceased depends on the facts. Even if lettings start again, it is not a given that this is a continuation of the previous business – it may instead by the start of a new property rental business.

To determine whether the existing property rental business is continuing or has ceased, it is necessary to look at the facts.

Considerations

In reaching a decision, consideration should be given to factors such as:

  • whether the same property is let before and after the break;
  • where the same property is re-let after a break, whether it been altered significantly during the empty period;
  • the length of the period between lets; and
  • the type of activities that constitute the property rental business before and after the pause.

For example, where the property rental business comprises a single property, the property rental business will not normally be regarded as ceasing where there is a break between lets while a new tenant is found.

HMRC’s rule of thumb

HMRC offer a rule of thumb as a guide to whether a property business has ceased. The old business is treated as stopping where there is an interval of more than three years and different properties are let in the old and new period of letting activity. A business may be regarded as continuing where the gap is more than three years, although evidence would need to be provided to show this is a case. This could be important where losses are involved, as losses from the old business cannot be set against profits of the old.

Cessation

Where a rental business comprises the letting of several properties, it will normally be regarded as having ceased when the last property has been sold or is used for another purpose, for example as a private residence. If there is only one property in the property rental business, the business would cease when the property was no longer available for letting. However, it would continue if the taxpayer bought a different property to let and lived in the original let property as his or her home.

Partner note: HMRC’s Property Income Manual at PIM2510.

 

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Are you a buy-to-let landlord who’s decided to take a mortgage payment holiday? We explain the impact on this on tax relief for interest payments in today’s blog.

Mortgage payment holidays and interest relief for landlords

In March, the Government announced that homeowners struggling to pay their mortgages due to Coronavirus would be able to take a three-month mortgage payment holiday. They confirmed that this option would also be available to buy-to-let landlords, who may suffer cashflow difficulties if, as a result of the virus, their tenants were unable to meet their rent in full when it is due. In May, the Government announced that those struggling to pay their mortgages because of the impact of Coronavirus would be able to extent their mortgage payment holiday by up to three months.

Where a landlord opts to take a mortgage payment holiday, what impact does this have on tax relief for interest payments?

Interest continues to accrue

The first point to note is that interest continues to accrue during the period of the mortgage holiday, although the landlord will not be required to make any payments during this time. This is important and will impact on the timing of the associated interest relief, which will depend on whether accounts are prepared on a cash basis or on the accruals basis.

At the end of the holiday, the missed payments and interest may be recovered by extending the term of the mortgage or by making higher payments once payments restart.

Relief as a basic rate tax reduction

From 2020/21 onwards, tax relief for finance costs (such as mortgage interest) on residential properties is given only as a tax reduction at the basic rate. This means that 20% of the allowable finance costs are deducted from the tax that is due.

Impact of a mortgage holiday – Cash basis

Most landlords whose rental receipts are £150,000 a year or less will prepare the accounts for their property rental business under the cash basis. As expenditure under the cash basis is recognised when paid, if the landlord does not make a payment, there will be no relief for that expense until the payment is made.

Where the landlord takes a mortgage, no interest will be paid during the period of that holiday. As a result, a landlord may pay less in interest in 2020/21 than in 2019/20. The interest rate reduction is calculated by reference to the interest paid in the year.

Example

Kevin has a buy-to-let property on which he has buy-to-let mortgage, the interest on is £500 per month. As a result of the Covid-19 pandemic, his tenant struggles to pay his rent on time. Kevin takes a three-month mortgage payment holiday. To mortgage term is extended as a result.

In 2020/21, Kevin only makes nine mortgage payments instead of the usual 12, paying interest of £4,500 rather than £6,000. The tax reduction for 2020/21 is £900 (£4,500 @ 20%) rather than £1,200 (£6,000 @ 20%).

Impact of mortgage payment holiday – Accruals basis

Under the accruals basis relief is given for the period in which the expense arises rather than when payment is made. As interest continues to accrue throughout a mortgage holiday, the landlord will be able to claim the full tax reduction on the interest accruing in the 2020/21 tax year, even if the interest was not paid in full in the year because the landlord took advantage of a mortgage payment holiday. If, in the above example, Kevin prepared his accounts for 2020/21 on the accruals basis, he would be able to claim a tax reduction of £1,200 rather than £900.

Partner note: ITTOIA 2005, ss. 272A

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If you have a holiday let but are worried you won’t meet the occupancy test this year, all is not lost. There are two routes by which it may be possible to reach the required occupancy threshold – an averaging election or a period of grace election.

Furnished holiday lettings – What can you do if you fail to meet the occupancy tests due to the Covid-19 pandemic?

Lets that qualify as furnished holiday lettings (FHL) enjoy special tax rules compared to other types of let, allowing landlords to benefit from certain capital gains tax reliefs for traders and to claim plant and machinery capital allowances for items such as furniture, fixtures and equipment. Profits from an FHL business also count as earnings for pension purposes.

To qualify as an FHL the property must be in the UK or (for the time being at least) in the EEA. It must also be let furnished and meet various occupancy conditions.

Occupancy conditions

To qualify as an FHL, all three occupancy conditions must be met. Where the let is continuing, the tests are applied on a tax-year basis; for a new let, the must be met for the first 12 months of letting.

Test 1 – Pattern of occupancy condition

This test is met if the total of all lettings that exceed 31 days is not more than 155 days in the year.

Test 2 – The availability condition

The property must be available for letting as furnished holiday accommodation for at least 210 days in the tax year (excluding any days in which the landlord stays in the property).

Test 3 – The letting condition

The property must be let commercially as furnished holiday accommodation to the public for at least 105 days in the year. Lets of more than 31 days are not counted unless the let exceeds 31 days as a result of unforeseen circumstances. Lets to family or friends on a non-commercial basis are also ignored.

Impact of Coronavirus

The hospitality and leisure sectors have been hard hit by the Covid-19 pandemic and the lockdown means that many landlords with holiday lets will fail to meet the letting condition in 2020/21. However, all is not lost and there are two routes by which it may be possible to reach the required occupancy threshold – an averaging election or a period of grace election.

Averaging election

An averaging election can be used where a landlord has more than one holiday let and one or more of the properties does not meet the letting condition. Instead of applying this test on a property by property basis, it can be applied by reference to the average rate of occupancy across all properties let as FHLs. Thus, the test is treated as met if on average the holiday lets are let for 105 days in the tax year.

While, at the time of writing, it was unclear when all the restrictions may be lifted, an averaging election may help landlords with mixed portfolios including some winter holidays lets as well as those that are popular in the summer.

Period of grace election

A period of grace election can be used where the landlord genuinely intended to meet the letting condition but was unable to. The Coronavirus pandemic is a prime example of where this may be the case.

To make a period of grace election, the pattern of occupation and availability conditions must be met. Also, the letting condition must have been met in the year before the first year in which the landlord wishes to make a period of grace election. If the letting condition is not met again in the following year, a second period of grace election can be made. However, if the test is not met in year 4 after two period of grace elections, the property will no longer qualify as a furnished holiday letting.

The election provides a potential lifeline to landlords of holiday lets unable to meet the letting condition in 2020/21 as a result of the Covid-19 pandemic. It can be made either on the self-assessment tax return or separately (either with or without an averaging election). A period of grace election for 2020/21 must be made by 31 January 2023.

Partner note: Self-assessment Helpsheet HS253.

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For landlords, the impact that unpaid or late paid rent has on the calculation of taxable profits depends on whether you prepare accounts on the cash basis or under the accruals basis. We go through some case studies in today’s blog

Late or unpaid rent – Impact on the calculation of a landlord’s taxable profits

As with other sectors, landlords may be adversely affected by the Covid-19 pandemic. Tenants suffering cashflow difficulties may be unable to pay their rent in full or on time. The impact that unpaid or late paid rent has on the calculation of taxable profits depends on whether the landlord prepares accounts on the cash basis or under the accruals basis.

Cash basis

The cash basis is the default basis of preparation for most landlords whose cash receipts for the tax year are £150,000 or less. Under the cash basis income is recognised when the money is received not when it is earned, and expenses are accounted for when the money is paid not when the expenses is incurred. Receipts are income of the period in which the money is received, and expenses are outgoings of the period in which they are paid. Consequently, there are no debtors or creditors.

This provides automatic relief where rent is not paid or is paid late, protecting the landlord from having to pay tax on money he or she has yet to receive.

Example 1

Harry is a landlord and lets a flat for £800 a month, payable on 25th of each month. Due to the Covid-19 pandemic, his tenant does not pay the rent that was due on 25 March 2020. The tenant eventually pays £200 of the overdue rent in June 2020 and the remaining £600 in September 2020.

Harry prepares the accounts for his rental property business on the cash basis, accounting for rental income only when the rent has been received. The rent due for March 2020 (falling in the 2019/20 tax year) is not received until June and September 2020 – which fall in the 2020/21 tax year. As a result, the rent for March is taken into account in computing Harry’s taxable profits for 2020/21 rather than 2019/20.

Accruals basis

Rental profit must be determined under the accruals basis in accordance with UK GAAP where the landlord is not eligible for the cash basis (for example, because rental receipts for the tax year are more than £150,000) or because the landlord elects for the cash basis not to apply. Under the accruals basis, rental income is taken into account in the period to which it relates, rather than when the rent is paid. Likewise, expenses are deducted when the expense is incurred not when the bill is paid, if different. There is no automatic relief if rent is not paid on time as under the cash basis.

Example 2

Louisa has a number of rental properties and as her rental receipts exceed £150,000 a year, she prepares the accounts of her rental business under the accruals basis. One of her tenants fails to pay the rent of £2,000 for March 2020 which was due on 1 March 2020. The tenant eventually pays the late rent in September 2020.

As accounts are prepared under the accruals basis, the rent due for March 2020 is taken into account in working out the taxable profit for 2019/20, regardless of the fact that it was paid in 2020/21 rather than in 2019/20.

There is, however, relief available where the rent remains unpaid and is not recovered, as opposed to being paid late – a deduction is permitted for a debt which is genuinely bad or doubtful.

Partner note: ITTOIA 2005, ss. 271A to 271D.

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Not putting a property in joint names prior to selling is an easily avoided mistake – read our blog to see if this would benefit you.

Potential benefits of putting a property into joint names prior to sale

Where a property qualifies in full for private residence relief, it is perhaps academic, from a tax perspective at least, whether a couple own it jointly or it is the one name only. In either case, the relief shelters any gain that arises and there is no tax to pay.

However, where a gain is not fully sheltered by private residence relief, as may be the case for an investment property or a second home, there can be very different tax consequences depending on how it is owned.

Take advantage of the no gain/no loss rules for spouses and civil partners

There are some breaks in the tax system for married couples and civil partners, and one of them is the ability to transfer assets between each other at a value that gives rise to neither a gain nor a loss. This can be very useful from a tax planning perspective to secure the optimal capital gains tax position on the sale of property where full private residence relief is not available. This enables a couple to utilise available annual exempt amounts and lower tax bands.

Capital gains tax on residential property gains is charged at 18% where total income and gains do not exceed the basic rate limit (set at £37,500 for 2019/20) and 28% thereafter.

Case study

Ron and Rita have been married a number of years and in addition to their main residence, they have a holiday cottage, which is owned solely by Ron. As their lives are busy, they no longer use the cottage much and decide to sell it. They expect to realise a gain of £100,000.

Rita does not work and has no income of her own. Ron is a higher rate taxpayer. Neither has used their annual exempt amount for 2019/20 (set at £12,000).

If they leave the property in Ron’s sole name, they will realise a chargeable gain of £88,000 after deducting his annual exempt amount of £12,000. As a higher rate taxpayer, this will give rise to a capital gains tax bill of £24,640 (£88,000 @ 28%).

However, as Rita has her basic rate band and annual exempt amount available, making use of the no gain/no loss rule to put the property in joint names prior to sale can save the couple a lot of tax. Each will realise a gain of £50,000.

As far as Ron is concerned, £12,000 of his gain will be sheltered by his annual exempt amount, leaving a chargeable gain of £38,000 on which tax of £10,640 will be payable.

Rita will also have a gain of £50,000, of which the first £12,000 is covered by her annual exempt amount, leaving a chargeable gain of £38,000. As her basic rate band is available in full, the first £37,500 is taxed at 18% (£6,750), with the remaining £500 being taxed at 28% (£140). Thus, Rita’s tax liability is £6,890, and the couple’s total tax bill is £17,530.

By taking advantage of the no gain/no loss rule to put the property into joint names prior to sale, the couple will be able to make use of Rita’s annual exempt amount and basic rate band, reducing the capital gains tax payable on the sale from £24,640 to £17,530 – a saving of £7,110.

Partner note: TCGA 1992, s. 58.

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It is easy to fall into the trap of assuming that legal and professional costs can be computed in calculating taxable profits if they are incurred wholly and exclusively for the purposes of the business; however this is only part of the story.  

Legal and professional fees – Capital or revenue?

At some point, a landlord is likely to incur legal and professional fees in connection with the running of their property rental business. It is easy to fall into the trap of assuming that these costs can be computed in calculating taxable profits if they are incurred wholly and exclusively for the purposes of the business; however this is only part of the story. The landlord must also determine whether the costs are revenue or capital in nature. The rules also differ depending upon whether the accounts are prepared on the cash basis or using traditional accounting under the accruals basis.

The rule

The nature of the legal fees follow that of the matter to which they relate – so if the fees are incurred in relation to an item which is itself revenue in nature, the legal and professional fees are also revenue in nature. Likewise, legal fees that are incurred in connection with a matter that is capital in nature are also capital in nature.
Legal fees that are revenue in nature would include, for example, fees incurred to recover unpaid rent, while legal fees that are capital in nature would include fees incurred in connection with the purchase of a property.

Cash or accruals basis

Revenue items are deductible in computing profits regardless of whether they are prepared under the cash or accruals basis, although the time at which the relief is given will differ. Under the cash basis, the deduction is given for the period to which the expenditure relates, for the cash basis the deduction is given for the period for which the expenditure is incurred.
For capital expenditure different rules apply. No deduction is allowed for capital expenditure under the accrual basis, whereas under the cash basis, the treatment depends on the nature of the item – capital expenditure is deductible under the cash basis unless the expenditure is of a type for which a deduction is expressly forbidden. Items of the forbidden list include expenditure in or in connection with lease premiums and the provision, alteration or disposal of land (which includes property).

Example of allowable revenue items

A deduction for legal and professional fees will normally be allowed where they relate to:
• costs of obtaining a valuation
• normal accountancy costs incurred in preparing accounts of the rental business and agreeing the tax liabilities
• costs of arbitration to determine the rent
• the costs of evicting an unsatisfactory tenant to re-let the property

Example of capital expenses

The following are examples of legal and professional fees which are capital in nature:
• legal costs incurred in acquiring or adding to a property
• costs in connection with negotiations under the Town and Country Planning Act
• fees incurred in pursuing debts of a capital nature, such as the proceeds due on sale

Leases

Leases can be tricky. The expenses incurred in connection with the first letting or subletting for more than one year are deemed to be capital and therefore not deductible – this would include the legal fees incurred in drawing up the lease, surveyors’ fees and commission. However, if the lease is for less than one year, the associated expenses can be deducted. Normal legal and professional fees on the renewal of a lease are also deductible if the lease is for less than 50 years; although any proportion of the fees that relate to the payment of a premium are not deductible.
If a new lease closely follows the previous lease, a change of tenant will not render the associated fees non-deductible. However, if the property is put to other use between lets, or a long lease, say, replaces a short lease, the associated costs will be capital and non-deductible.

Partner note: HMRC’s Property Income Manual PIM 2120

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Renting out a property at a rate below the commercial level might sound like a great idea – but it might cost you dearly if you try to seek tax relief for your expenses!

Properties not let at a commercial rent

There may be a number of reasons why a property is occupied rent-free or let out at rent that is less than the commercial rate. This may often occur where the property is occupied by a family member in order to provide that person with a cheap home. For example, a parent may purchase a house in the town where their student son attends university and let it to the student, and maybe even his housemates, at a low rent to help them out. While the parents’ motives are doubtless philanthropic, their generosity may cost them dearly when it comes to obtaining relief for the associated expenses.

Wholly and exclusively rule

Expenses can only be deducted in computing taxable rental profits if they are incurred wholly and exclusively for the purposes of the property rental business. Unfortunately, HMRC take the view that unless the property is let at full market rent and the lease imposes normal conditions, it is unlikely that the expenses are incurred wholly and exclusively for business purposes. So, where the property is occupied rent-free, there is no tax-relief for expenses.

If the property is let at a rent that is below the market rent, a deduction is permitted, but this is capped at the level of the rent received from the let. This means that where a property is let at below market rent, it is not possible for a rental loss to arise, or for expenses in excess of the rent to be offset against the rent received from other properties in the same property rental business.
Periods between lets

Where there are brief periods where the property is occupied rent-free or let out cheaply, it may be possible to obtain full relief for expenses. For example, if the landlord is actively seeking a tenant and a relative house sits while it is empty, relief will not be restricted as long as the property remains genuinely available for letting. In their guidance HMRC state, that ‘ordinary house sitting by a relative for, say, a month in a period of three years or more will not normally lead to loss of relief’. However, if a relative takes a month’s holiday in a country cottage, relief for expenses incurred in that period will be lost.

Commercial and uncommercial lets

Where a property is let commercially some of the time and uncommercially at other times, expenses should be apportioned on a just and reasonable basis between the commercial and non-commercial lets. Any excess of expenses over rents in the period when commercially let can be deducted in the computing the profit for the rental business as a whole. However, an excess of expenses over rent when the property is let uncommercially are not eligible for relief.
Timing must also be considered – expenses relating to uncommercial lets cannot be deducted simply because they are incurred when the property is let commercially.

Partner note: HMRC Property Income Manual PIM 2130.

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This blog explains what qualifies for relief for finance costs, the limit on eligible borrowings, and how capital repayments work with a quick example.

Allowable finance costs

Although the way in which landlords obtain relief for finance costs on residential properties is changing, there is no change to the type finance costs that are eligible for relief.

What qualifies for relief

The basic rule is that relief is available for expenses that are incurred wholly or exclusively for the purposes of the property rental business, and this rule applies equally to finance costs. Relief is available for eligible finance costs where they meet this test.

The definition of finance costs includes mortgage interest and interest on loans to buy furnishing and suchlike. Relief is also available for the incidental costs of obtaining finance, as long as the interest on the loan is allowable. Incidental costs of loan finance include items such as arrangement fees, and fees incurred when taking out or repaying loans or mortgages.

Limit on eligible borrowings

A landlord can obtain relief for the costs of borrowings on a loan or mortgage up to the value of the property when it was first let. Buy-to-let mortgages are often more expensive than residential mortgages with interest charged at a higher rate. The loan does not have to be secured on the let property. Where a landlord wishes to buy a rental property and has sufficient equity in their own home, it may make commercial sense to release capital from the home by borrowing against it and using the money to purchase the rental property. Interest on the loan is eligible for relief, despite the fact the loan is not secured on the rental property.

No relief for capital repayments

Capital repayments, such as the capital element of a repayment mortgage or loan repayments, are not eligible for relief. Where the borrowings are in the form of a repayment mortgage, it will be necessary to split the payment between the interest and capital when working out the relief. The lender should provide this information on the statement.

Example

Mervyn wishes to invest in a buy to let property. As he only has a small mortgage on his home, he remortgages to release £150,000 of equity.
Following the remortgage, he has a mortgage of £200,000 on his own home. Using the released equity, he buys a property to let for £150,000. He spends some time renovating the property in his spare time before letting it out. When the property is first let, it has a value of £160,000.

During the 2019/20 tax year, Mervyn pays mortgage interest of 10,000and makes capital repayments of £10,800. The property is let throughout.
Mervyn can claim relief for 80% of the interest costs – this is attributable to the borrowings of £160,000 (80% of the loan of £200,000), being the value of the let property when first let. The interest eligible for relief is therefore £8,000 (80% of £10,000). For 2019/20, 25% (£2,000) is relieved by deduction with the balance giving rise to a deduction from the tax due of £1,200 (75% x £8,000 x 20%).

No relief is available for the capital repayments.

Partner note: ITTOIA 2005, ss. 272A, 272B, 274A, 274B

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