Tax issues for buy to let landlords

The tax burden on buy to let landlords has increased significantly from removal of interest relief to higher capital gains tax. Tim Palmer CTA ATT, senior partner, Palmer Consultancy Partnership, explains the key issues to consider

Tim Palmer, CTA ATT, senior partner, Palmer Consultancy Partnership

A few years ago, a raft of tax changes really increased the tax liabilities of individual landlords who rented out residential property.

The capital gains tax (CGT) 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.

Tax year	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); and

• 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, ie, 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 accountants should ask landlords

• 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 Julie (another landlord), some planning could be done in this situation. You could ensure that Fred leaves all the ageing items behind that he does not want, so that Julie can replace them (see example below). Similar planning and procedures can be undertaken when you are about to leave and let out your old home.

Example

Mary completed the sale of her rental flat to Fred on 22 September 2023. Mary, as part of the deal (included in the acquisition price) left behind the wardrobes, curtains, carpets, sofas, TV and kitchenware. Mary reported this 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 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 SDLT rates for 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 for purchase of 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.

60-day CGT pay and file regime

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. The CGT must be 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 eco-upgrades 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.