Landlord Tax in 2017

Tax saving opportunities in 2017 for landlords?

2017 is characterised by the start of a number of significant tax changes affecting buy-to-let landlords. To find out the full details about a landlord’s current income tax obligations you should read our guidance featured in the Landlords Bible.

To calculate a landlords income tax liabilities why not use our FREE landlord income tax calculator?

A shortcut to the latest tax changes in 2017 is given below:

1. 2017 marks the beginning of the phasing out of mortgage interest payments for landlords with the introduction of a maximum of 75% of these payments being offset able from April. This removes the ability for landlords to offset all their loans costs against rental income and profit. Instead there will be a sliding scale of tax credits paid at the basic rate which will be brought in to off set the loss of loan payments. The sliding scale will continuously ramp up until 2020 when none of the loan costs will be allowable and instead a 25% tax credit will be given on your loan costs. A landlord will then pay tax on their full rental profits after the deduction of this tax credit. Sounds weird? Well it is. It doesn’t make sense in terms of any other type of business accounting practice but the Government seems desperate to cream off what they see as ‘super profits’ from many landlords who are making exceptional rental profits as a result of historically low interest rates and rising rents hence the change.

This change does not affect landlords who hold their properties in a company; this has prompted more landlords than ever to consider incorporating their rental business.

2. The 10% blanket allowance for furnished letting has been removed and replaced instead by Replacement Domestic Items Relief (RDIR). An allowance for furnishings still exists but for many landlords with furnished property it is now much less generous with a landlord having to prove expenditure on each replacement item.

3. A landlord no longer has the chance to flex their green credentials with the removal of the Landlord Energy Saving Allowance ( LESA ).

Despite these changes in tax there are still numerous legal ways of saving landlord tax

Tax deadline for landlords

There are a number of critical tax deadlines for Landlords and most of us have until the 31st of January to submit their self assessment tax return online. It is also possible to record and compile the information you need under the Land and Property Section using Property Hawk’s FREE Property Manager 3.0s. 

There are also a number of other critical landlord dates to be aware of.

Refurbishing a property – landlord maximise your tax savings

A landlord can use the taxman to help refurbish their next buy-to-let project if they are careful with their accounting practices. One issue to pay careful attention to for landlords refurbishing rental properties is the ability to offset the costs of refurbishment as repair and renewal costs. What do I mean? Well take for example an apartment where the refurbishment requires:

A new boiler
New electrics
New bathroom
New kitchen
New flooring

All these are capital items, however their replacement in an existing buy-to-let could equally constitute repair and renewal costs which are also revenue costs. Clearly, a landlord can only claim once for these expenses so a landlord will need to elect at the beginning whether they wish for all or some of them to be classed as revenue or capital costs. One factor that may influence their decision could be a landlords eventual exist strategy. If for instance you are likely to sell the property as an investment property (a buy-to-let) then the capital costs will be added to your base costs and reduce your potential Capital Gains Tax liability. However, consider the scenario where you end up occupying the property as your main home. In this case there would be no point in allocating the refurbishment costs as capital costs because no CGT would be payable on sale.

The point is then that a landlord may as well allocate the refurbishment costs against their rental profits to reduce their overall income tax liabilities. Where refurbishment costs are significant and on going over many months then this could reduce a landlords income tax liability significantly over a period of 1 or 2 years. It’s also a tax efficient way of investing in a property because the refurbishment costs are effectively subsidised by an income tax break. For example £10,000 invested in the refurbishment of a property will only cost a net of £6,000 when the tax reduction is taken into account if the marginal income applies to a higher tax band payer.

If the landlord is likely to sell the property as their principle private residence then no Capital Gains Tax will be liable so their is no point in attributing the costs of refurbishment to the base cost of the rental property. In these circumstance it would make more sense to attribute the costs as revenue costs reducing a landlords tax liability under the Land and Property Section on their Self Assessment Return. Clearly there are big tax savings to be had for landlords looking at refurbishing property but they need to think through carefully their exit strategy and plan accordingly.

It’s worth noting that a recent court case held that despite a period of occupation was brief at only 7 weeks in Dutton-Forshaw v HMRC (2015) UKFTT 0478 (TC) the tribunal was satisfied that the taxpayer hoped to live at the property on a continuous basis and was eligible for Private Residence Relief (PRR) on the property. Evidence that the taxpayer intended to live at the property were:

He had applied for a parking permit at the property
He had notified his local authority for council tax purposes
He had no other home.

This case also refers to previous similar cases Morgan v HMRC (2013) UKFTT 181.

Landlords selling up in 2017

If landlords have had enough of the whole owning and renting property they may well be tempted to sell up their property holdings in 2017. Unfortunately, by exiting their property investments this is not without tax implications. A landlord might have done their best to sidestep paying much income tax on their rental income by cleverly offsetting rental expenses against rental income however, the tax man will be after you with his begging bowl looking to snare you for Capital Gains Tax.

To ask a specific question about tax or finance then go to our landlord legal forum.