Tax issues for Residential Landlords

Written by Sam Pooley, Assistant Tax Consultant 

The ever-changing tax landscape has turned against the landlord. A number of changes have been introduced that will have a negative impact on residential landlords, and in particular those with only one or two rental properties.

Income Tax

A number of income tax measures have been introduced that will now be impacting the taxable profits of landlords. Firstly, the popular wear and tear allowance was abolished from 6 April 2016 onwards. As a result, landlords letting furnished property can no longer claim relief annually against the wear and tear of the furnishings provided. Instead, the cost of replacing these items can be claimed. For most landlords this change will result in an increased tax liability as the wear and tear relief was generous and generally more tax efficient than claiming on the replacement basis (as it was always possible to choose between the available reliefs). In addition, there is no relief for the initial purchase of furniture provided in a rental property.

A further change commenced on 6 April 2017 restricting the relief on mortgage interest. The idea behind the change is to restrict the relief to the basic rate of tax only, however the implementation has created a few anomalies along the way. One of those anomalies is with the High Income Child Benefit Charge where some landlords have become subject to the charge only as a result of the mortgage interest changes.

The change treats the basic rate relief for the mortgage interest as a tax reducer rather than an allowable expense which causes the negative effects by showing higher taxable income in the income tax calculation for the individual. The mortgage interest changes are being implemented in stages over a 4 year period which will steadily reduce the relief obtained by higher rate taxpayers.

Capital Gains Tax

Since 6 April 2016 the disposal of residential property has attracted an increased rate of capital gains tax, 8 percentage points higher than the normal rates. This is a further cost that landlords have to consider that arises on disposal of the property.

Recent tribunal decisions have confirmed the position that properties rented as furnished holiday lets do not automatically qualify for the Entrepreneur’s Relief rate of capital gains tax at 10%. In rare cases, where a wide range of additional services are provided the relief may be available.

Stamp Duty Land Tax

Any purchaser of residential property in the UK is subject to a 3 percentage point increase on the SDLT rate where they own more than one residential property at the end of the day of the purchase. The only exception to this rule is where the purchaser is replacing their main residence.

Non-resident landlords

Landlords that are not UK resident for tax purposes are now subject to capital gains tax on the disposal of UK residential property on gains arising after 5 April 2017. From 5 April 2019, non resident landlords of commercial property will also be subject to capital gains tax on gains arising after this date. Previously, non-resident landlords were exempt from capital gains tax. 

There are three options for calculation of the tax and returns need to be submitted to HMRC within 30 days of sale, so it is important that non-resident landlords are aware of their obligations in order to be prepared to meet this deadline.

The non-resident landlords scheme continues to operate meaning that the letting agent or tenant is liable to withhold tax on rental income but landlords can opt out of this scheme and pay the correct amount of tax through the submission of a self assessment tax return.