Tax Returns – mortgage interest relief

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Tax Relief:

Starting from 6th April 2017, those landlords with mortgages will have tax relief on their buy-to-let mortgage costs gradually reduce over a 4-year period.

Many landlords don’t have a mortgage (up to 50% it is said), so this change does not affect them, but many landlords have grown their property portfolios based on large mortgages, so this will affect them, and higher rate taxpayers will be most affected.

Historically, businesses have always been able to offset their loan interest against income, and that’s been the case with residential property up to now. So, it goes against the grain that landlords with properties in their own name (as opposed to a limited company) will now lose it. It’s been a major tax advantage and one of the main reasons for the rapid growth of buy to let portfolios over recent years. For various reason the Chancellor has decided to slow down this growth.

From the tax year April 2017 to April 2018 landlords will have to declare their rental income in a different way, which will mean that some landlords will face higher tax bills, and some will involuntarily become higher rate taxpayers, as a result of the increased income they are obliged to declare.

Under the old landlord tax regime income tax is paid on net rental income, that is, the profit left over after allowable expenses and mortgage interest have been deducted.

As most buy-to-let landlords have interest only mortgages, they claim all of their mortgage repayments – capital re-payments are not allowed. However, mortgage set-up costs were, and this will also now change.

An example under the old rules, which expire 5^th April 2017

A landlord received £2540 per month rental income from his portfolio, with mortgage interest payments of £1500 per month.*

Annual rental income is £30,480

Annual (interest only) mortgage interest is £18,000

The landlord’s taxable income is £30,480 less £18,000 = £12,480

If the landlord is a basic-rate taxpayer (20%) the tax payable would be £2,496

If the landlord is a higher-rate taxpayer (40%) the tax payable would be £4,992

*This example is based on the tax year 2016-2017, the last year of the old rules, where the tax return and payment must be made by 31^st January 2018. The calculation does not take into account any additional personal income but as you can see, the calculation is very straightforward.

Landlord mortgage interest tax relief from tax year 2017-2018

Under the new regime, affecting residential rental income for the tax year 6^th April 2017 to 5^th April 2018, where the tax return must be submitted by 31^st January 2019, the tax calculation quite is different.

The big difference is that over 4 years the amount of mortgage interest you can deduct each year from rental income is reducing.   By 2020 none of the mortgage interest will be deductible from rental income as an expense. But instead a “tax credit” equivalent to the basic rate of tax (currently 20%) will be set-off against total income.

All of the rental income will be taxable for 2020 – 2021, but landlords will instead receive a 20% tax credit of their mortgage interest amount. This means that landlords can reduce their total tax bill by 20% of their mortgage interest amount.

Under this new regime a landlord’s tax bill could potentially be increased in three ways:

• Instead of offsetting mortgage interest payments off against rental income, this is reduced to zero
• Higher or additional-rate taxpayers will find their tax credit refunds to a maximum of 20% of the mortgage interest, rather than at the top rates of tax they pay.
• Some landlords will be pushed into a higher tax bracket because they cannot now offset the mortgage interest against their rental income, as an expense item.

Working out your tax liability under the new regime is not quite as straightforward as it may seem at first sight. The government has produced a guide “Tax relief for residential landlords: how it’s worked out”, with some useful examples, see the link below.

Can landlords reduce their tax bill by incorporating?

This changes to the tax regime are aimed at buy-to-let landlords. Residential landlords with properties in their own name. The changes do not affect landlords with commercial properties or those properties that are sheltered within a company structure.

There are pros and cons to incorporation and in some cases there are more cons that pros, so anyone considering incorporating to avoid tax should consult a tax specialist to look into their individual circumstances before doing so.

Tax relief for residential landlords: how it’s worked out

The Self-Assessment Tax Return, HMRC Form SA100, and Property income supplementary – HMRC Form SA105 – available here

Declaration of beneficial interests in joint property and income – HMRC Form 17

Filing your tax return online here

Free LandlordZONE Excel Tax workbook tool – download it here

Next Article in the series – What is an Allowable Expense?

HMRC is increasing its targeted compliance activity across the private rented sector through taskforce activity – see HMRC – Tackling the Hidden Economy

HMRC says it is encouraging those who have been non-compliant to come forward through activities such as the Let Property Campaign

©1999 – Present | Parkmatic Publications Ltd. All rights reserved | LandlordZONE® – Tax Returns – mortgage interest relief | LandlordZONE.

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‘How to rent’ booklet update

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A new edition of the ‘How to rent’ guide written by the Ministry of Housing, Communities & Local Government has been released on 17th January 2018.

Please Click Here to download the full document which must be provided by landlords and agents to all new tenants.

The post ‘How to rent’ booklet update appeared first on Property118.

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Is Your Accountant More Of A Book-Keeper Than Tax-Planner?

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Having a good accountant to check your books, make sure you claimed for everything you should and nothing you shouldn’t is very important.

At this time of year, we are all dealing with just that, our year end tax returns and paying our tax by 31st January.

The post Is Your Accountant More Of A Book-Keeper Than Tax-Planner? appeared first on Property118.

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Debt Collection for Landlords

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Debt Collection for Landlords:

At this time of year, soon after the Christmas spending spree, inevitably rent payments begin to suffer. If you are having problems with rent arrears, this article should help.

As in most areas of life, prevention is better than cure. To reduce the risk of being owed money, it is sensible to take precautions before entering into tenancies and other contracts.

Always Check Out Your Tenants

A little time spent investigating who you intend doing business with can detect warning signs which indicate whether the customer is likely to be a bad payer. It is very important to investigate the financial background of a company or individual.

It is possible to build up a reasonable picture of a potential customer by a few basic checks that do not cost much. Credit information can sometimes be ambiguous and so care must be taken as to what it could mean.

You Need a Good Agreement

All businesses, other than those engaged in the most straightforward of transactions, should have a document which sets out the standard terms on which it does business. The importance of having an understandable contract or agreement should not be forgotten when it comes to credit control.

The terms should be unambiguous because if there is uncertainty over the terms of the contract, it will usually be interpreted against the person seeking to rely on the unclear clause.

Letting agreements and leases are vital in this regard: downloading a free lease or letting agreement from a web site is one thing. Dealing with the consequent problems when your tenant, who has been occupying your property for some years and has security of tenure, turns sour – that’s another story.

Don’t skimp on your agreements and this is particularly important with commercial lettings. Off the shelf agreements have their uses, but for a serious long-term commercial letting you need a comprehensive lease drawn up by a competent commercial lawyer to fully protect your interests.

Late Payment of Commercial Debts (Interest) Act 1998

Many terms and conditions of business have clauses which charge interest on late payment. Under the Late Payment of Commercial Debts (Interest) Act 1998 as amended by the EU Directive which was implemented on 7 August 2002, all businesses may charge interest and fixed compensation for late payment. Even if the terms of business do not refer to the legislation, its provisions are implied into the contract. However, it is better to have a clause in your terms of business.

The provisions of the legislation only apply where the customer is acting in the course of business, so would not apply against a consumer. The Late Payment legislation permits interest to be charged at the rate of 8% above the base rate on accounts after 30 days from the date of the invoice or when the good were delivered or services provided.

If different payment terms have been agreed, then interest can be charged when payment becomes due under the contract. The level of compensation which may be charged for late payment in addition to interest depends on the amount of the debt:

• For debts below £1,000: £40 in compensation
• For debts from £1,000 to £10,000: £70 in compensation
• For debts over £10,000: £100 in compensation

These fixed charges were introduced to help compensate creditors for the costs of chasing late payment.

Key Points and Debt Collection

• Have clear unambiguous agreements and terms of business – don’t skimp on these
• Have a system for debt collection, don’t delay, make an impact, follow a time table.
• Be persistent and patient – it can time time to collect debt, but if you persevere you’ll get it in the end.

Have a System for Chasing debts

Every landlord should have a system for chasing late payments. If your procedure for filtering out potentially bad payers is effective, then it will not usually go beyond reminders. When it becomes clear that the tenant is delaying payment or is not going to pay, then a certain degree of skill will be required to recover the debt.

It involves absorbing all the information you have about the debtor and placing yourself in a position of control. The key factor to success here is to use a method that makes an impact.

Although when chasing commercial debts, the circumstances of one outstanding debt are unlikely to be identical to another, it is possible after years of experience to identify the reasons and excuses for non payment.

Recovering from Individuals

Effective debt recovery is about being alert to warning signs which you are aware of from previous experience. This may mean you are perceived as dealing with a tenant without an open mind, but your aim as a debt collector is to recover money which will maintain your cash flow.

Recovering a debt from an individual involves different skills and techniques than those used for chasing money from a business. It may be argued that it is more difficult to recover debts from an individual who is hard up or without a fixed address. On the other hand, it may be easier to recover debts from some individuals because it is personal to the debtor and so you are more likely to provoke a response.

Tracing Tenant Debtors

Tenants in rent arrears often abscond not leaving you with a forwarding address. This should not be a major calamity if your tenant has filed a comprehensive Tenancy Application Form with you at the start of the tenancy. This will give you all the information you need including next of kin to enable you to trace your debtor tenant.

Tracing Agents will trace debtors for a reasonable fee – usually around £0 to £90.

Having achieved a response, you have an opportunity to negotiate a repayment plan. Small but regular installments are probably the best you can expect. Even if you go to court and obtain judgment, the debtor can ask the court to order payment by low weekly installments.

Sometimes, a debtor’s statement of their financial circumstances shows excessive expenditure on certain items. In such cases, the creditor may wonder whether the debtor is trying to disguise the true extent of their financial position.

Section 21 & Section 8

When a tenant in residence gets into arrears it’s often preferable to gain possession of the property first (section 21 route) as opposed to using the section 8 route. You can then go for the arrears, which may then also include dilapidations expenses, through the normal Small Claims process.

The section 21 route gives automatic possession, providing your paperwork is in order, whereas a section 8 route can mean all sorts of difficulties and usually deferred possession orders.

Commercial Tenancy Arrears

In the case of commercial tenants in arrears you should carefully weight the pros and cons of small claims, using bailiffs or outright forfeiture. All these will depend on the circumstances, particularly the length of the lease and the prospects for the tenant’s business.

Doing it Yourself or Using a Solicitor?

Once you have tried all the various telephone and written techniques to recover the money, then court action is an option unless you decide that the debt is not worth pursuing. Recovering a debt through the county court process can be frustrating, but to improve your chances of succeeding it is important to have a good understanding of the legal procedures. There are strong economic arguments for landlords and companies handling small claims in-house.

However, with the small claims limit currently at £5,000, a debt just under this level can represent a considerable sum to a small landlord or business. Therefore, it might be worth instructing solicitors to avoid mistakes even though only limited fixed costs can be recovered in the small claims procedure.

There are some situations in small claims where you can recover your legal fees under CPR Part 27.14.2(g). This is where the other party has acted unreasonably. Unreasonable conduct is not defined but there many cases which give guidance as to what is unreasonable conduct.

The court will not often grant legal costs for unreasonable conduct but it is worth bearing in mind as it may make it worthwhile instructing solicitors to pursue a debt.

Article by: Anthony Reeves, legal consultant

Avoiding Rent Arrears

LandlordZONE Directory – Deb Collection

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