Presented by Louisa Norton ACA CTA Chartered Accountants | Business Advisers Landlord & Tenant Update: Changes that will affect you – Budget 2015

1. Factors to consider  Proven to be a successful investment  Capital appreciation exceeding inflation  Gross return now not as high DosDon’ts ResearchSelf manage (inc. family) Long term investmentCut corners on documentation Quality decoratingBuy a ‘money pit’ Your sumsForget your tax return

2. Which Property? Location – schools/ transport… Demand – one bed / three bed Agents Tenancy Agreements ?

3. Tax On Rental Income Rents received minus allowable expenses However… Changes in Summer Budget mean that mortgage interest will gradually become a non-allowable expense 20% of the disallowed interest will be used as a tax reducer instead Restricted to relief at basic rate of tax (20%) Any unused amount will be carried forward to the next year

BRHR Rental Income£40,000 Expenses(£15,000) Mortgage Interest(£10,000) Taxable Income£15,000 Tax to pay£3,000£6, Tax Relief Examples 2015/16

5. Tax Relief Examples 2018/19 BRHR Rental Income£40,000 Expenses(£15,000) Mortgage Interest(£10,000) Only 50% deductible Taxable Income£20,000 Tax£4,000£8,000 Tax Reducer20% of £10,000 but only 50% deductible (£1,000) Tax to pay£3,000£7,000

6. Tax Relief Examples 2020/21 BRHR Rental Income£40,000 Expenses(£15,000) Taxable Income£25,000 Tax£5,000£10,000 Tax Reducer20% of £10,000 (£2,000) 20% of £10,000 (£2,000) Tax to pay£3,000£8,000

7. Tax Relief Examples 2016/172017/18 Rental Profits£10,000 Mortgage Interest(£6,000)(£4,500) only 75% Net Income£4,000£5,500 Higher rate tax 40%£1,600£2,200 Tax ReducerN/A(£300) 20% of £1,500 Tax to pay£1,600£1,900 Effective tax rate on the £4,000 profit 40%47.5%

8. Planning Consider other income and those who border higher rates of tax High Income Child Benefit Charge (HICBC) Higher student loan repayments Contemplate restructuring your portfolio e.g. –A company –Ownership –Sale –Debt consolidation

9. Planning Transferring rental business into a company: –Stamp Duty Land Tax (SDLT) –Capital Gains Tax –Legal admin –Mortgages could be more expensive –Annual Tax on Enveloped Dwellings (ATED) Possibly worth it for some, but mostly not!

10. Jointly Owned Property  Where husband and wife co-own HMRC assumes a 50/50 split – joint tenants  For any other split of income a Form 17 must be completed – tenants in common  Form 17 is not reversible  Capital gain on property must be split according to ownership

11. The End of Wear & Tear Allowances April 2016 – new relief 10% calculation (gross rents less council tax & water rates) Capital cost of replacements Applies to furnished & unfurnished properties Improvements relieved on the eventual sale, repairs offset against rental income Fitted items integral to the building would be classed as a repair; i.e. baths, toilets, boilers, fitted kitchen units etc. Easier than calculating 10% Wear & Tear Consider deferring expenditure as no retrospective relief

Refurbishing a kitchen will count as a repair if the kitchen is of a similar standard to the one it replaces. If the kitchen is upgraded (i.e. increase in size or using higher quality materials) then considered capital in nature. HMRC will accept the following as repairs: rewiring, plastering, tiling and replacement of fixed fittings such as sink and cooker. Example:

12. Property Expenses  Rents, rates, insurance: ground rents & service charges for leased properties, heating & lighting costs, water rates & council tax etc.  Interest & other finance charges (but restricted from 2017)  Wear & Tear (changing to Replacement Cost)  Property repairs, maintenance (not improvements)  Legal, management & other professional fees: accountancy fees (drawing up property business accounts etc.), letting agents’ fees, advertising for tenants etc.  Costs of services provided, including wages: gardening, cleaning & security services etc. where relevant  Other property expenses: motor expenses for travelling to the property, stationary etc. Wholly & Exclusively

13. Furnished Holiday Lettings (FHLs) Must be available to let for 210 days Must be actually let for 105 days 105 day rule can be averaged over a number of properties or skipped for a year or two Eventual sale – CGT at 10% under Entrepreneurs’ Relief Capital Allowances available as FHLs are classed as being a business

14. Tax On Sale  Capital Gains Tax at 18% or 28% dependent on tax bracket  Proceeds minus original cost minus allowable costs: –Solicitors’ and estate agents’ fees –Cost of improvements –Capital losses  Annual Exemption  Principal Private Residence (PPR) / lettings relief  Paying off mortgage is NOT a tax deduction!

15. Letting the Main Residence  Rent a Room Relief – letting out a room/ rooms in your main PPR  April 2016 the current rent a room limit of £4,250 will increase to £7,500  May pull a few people out of Self-Assessment Tax Returns  Lower tax bills for those earning just above the allowance

16. Student Lettings  Student purchases property  Rent rooms to other students  Rent a room relief  Parent acts as guarantor on mortgage

Questions? Thank you for listening Newton Abbot Totnes Exeter

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