Landlords have a lot to consider at the best of times, but it is fair to say 2020 has been a challenging year for the industry. Dealing with the impact of the COVID-19 pandemic is the most pressing concern, but it is vital Bridgwater landlords realise there are other challenges they must contend with this year.
As always, tax is a major issue for landlords, and there are two critical pieces of tax legislation that will impact landlords’ businesses this year.
Tax relief for finance costs
It is fair to say landlords have had some time to come to terms with the changing nature of tax relief for finance costs. It used to be that landlords could deduct all their finance costs from their rental income, with profits being taxed at the marginal rate. Of course, this is no longer the case.
As of April 2017, a four-year phasing period started, reducing tax relief for finance costs, restricting them to the basic rate of tax.
From April 2020, there will be a 20% tax on interest payments. While this is far from ideal, and it will post some challenges for landlords, it can only be hoped the lengthy lead-in has allowed landlords time to adapt to these changes.
Capital Gains Tax: Private Residence Relief
With a number of landlords stating they intend to leave the sector; it is important people are aware of what happens when they sell the rental property. There have been some changes to Capital Gains Tax, and this might influence the decision a landlord makes.
As of April 2020, landlords can only claim Private Residence Relief, PRR, for the time they have lived in the property, and an additional nine months. This is a reduction from 18 months, which means landlords will lose out on nine months’ worth of CGT when they sell their property.
Another change which has come into effect as of April is landlords can only benefit from CGT relief of up to £40,000 when they have been in a shared occupancy with their tenant.
There has also been a significant change to the payment of a CGT bill. It used to be the landlord could settle this in their tax bill for the relevant year, but as of April 2020, this bill must be paid in 30 days of the sale concluding.
The amount of money which the landlord has to pay hasn’t changed, but the timescale has changed considerably. This may place some landlords in financial difficulties, and it is vital that landlords allocate funds to pay this bill as it arises.
Rachael Griffin is a tax and financial planning expert at Quilter, and she discussed the 30-day deadline and how it doesn’t offer landlords much time. Rachael said; “For those who own more than one property they will need to ensure they are prepared for any liquidity issues that may subsequently appear following the reduction in the time to pay the charge. People selling a house need to make sure they have taken into account all the fees and charges they have to pay to estate agents, solicitors and the like, in order to have enough left over to pay this tax.”
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