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April 2020 changes to tax relief and energy efficiency rules

Further changes in regulation and taxation are coming into force that affect landlords from April 2020.

Here we’ve outlined what these changes are, and outlined some of the strategies landlords can investigate to mitigate their impact.

Income tax declarations

Starting from the new tax year, landlords won’t be able to deduct any mortgage interest payments from their rental income for the purposes of calculating their taxable income – meaning they will pay tax on all their rental income, at their top rate of tax.

They will, however, be able to claim a tax credit equivalent to 20% of their mortgage interest payments and offset this against their bill. The changes mean tax relief will reduce a landlord’s tax liability, rather than their taxable income (as it was before).

Let’s look at an example, based on a landlord receiving £12,000 annual rent, with annual mortgage interest payments of £8,000:

Landlord’s tax bracket

Tax bill on £12,000 annual rental income

Tax relief (20% of £8,000 mortgage interest payments)

Total tax bill in 2020

20%

£2,400

£1,600

£800

40%

£4,800

£1,600

£3,200

45%

£5,400

£1,600

£3,800

It’s also worth remembering that landlords will have to declare their entire rental income – not just their profit after deducting mortgage interest payments.

So while our example landlord would previously have to declare only £4,000 for the purposes of income tax, they’d now have to declare £12,000. And this change could push them into the next income tax bracket, dramatically increasing their bill.

Changes to Capital Gains Tax

Many landlords are renting out homes they once lived in themselves. Currently, if they sell the property at a profit, they are eligible for ‘lettings relief’ – meaning they don’t pay tax for the years they lived at the property, plus their last 18 months of ownership (even if they weren’t living there during this time).

From April, lettings relief will be abolished – unless the landlord shares the property with their tenant. The exemption period at the end of the ownership will also be halved, from 18 months to nine.

Any Capital Gains Tax due as a result of the sale of a property must, from April, be paid in full within 30 days of the sale – as opposed to the end of the next tax year, as currently.

EPC ratings

Minimum Energy Efficiency standards were introduced for new tenancies for the first time from 1st April 2018, and will be extended to existing tenancies from 1st April 2020. It’ll be against the law to rent out a property that doesn’t meet the minimum ‘E’ rating, unless an exemption applies. Civil penalties of up to £4,000 can be imposed for a first breach, with far larger fines for subsequent breaches.

From April 2020, landlords are expected to contribute as much as £3,500 towards energy efficiency improvement works for properties with an ‘F’ or ‘G’ rating – but they can apply for an exemption if the works will cost more than that.

Fitness for Human Habitation Act

The Fitness for Human Habitation Act 2018, which has applied to new tenancies in England since 20th March 2019, will be extended to all existing tenancies in England from March 20th, 2020. This introduces a number of requirements about the maintenance and upkeep of your properties for tenants.

Be aware that the Act provides for tenants arguing that the layout of a property makes it unsuitable for human habitation – even if it’s in good order and well-maintained. The Government’s guidance for tenants is a vital read.

Mitigating the impact of these changes

We’ve examined previously the benefits of becoming a limited company in reducing your income tax liability. But transferring ownership of properties to any limited company will constitute a sale – even if no cash changes hands – and that may result in a punitive Capital Gains Tax bill… especially with the changes coming into place that affect this. Your financial adviser can offer more guidance.

Another way to mitigate your tax income is by converting your existing residential investments to furnished holiday lets – which may be an option for seaside and city centre properties with Airbnb appeal.

Rent from these properties is considered ‘earned’ by HMRC as holiday lets are businesses, unlike residential buy-to-lets, which are classed as investments. As long as the property is available for at least 210 days a year and let for at least 105 days, it qualifies as a holiday let – meaning you can still claim tax relief on mortgage interest.

Holiday let landlords can also claim capital allowances (instead of wear and tear allowances that long-term rental landlords receive).

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