Boris Johnson’s government appears to have forgotten about landlords, when it comes to financial help to deal with the effects of the Covid-19 pandemic.
Self-employed landlords are not eligible for grants under the Self-Employment Income Support Scheme. While a landlord who operates through a limited company could potentially have been furloughed as a working director, this was only an option if the landlord-director did no work while on furlough, and if properties are rented out this will not normally be possible.
Relief for unpaid rent
Throughout the pandemic, tenants remain liable for their rent. Although the government has put some measures in place to help tenants whose finances are adversely affected by the pandemic, landlords may find that some tenants fall behind with their rent, or are unable to pay.
From a tax perspective, the impact depends on whether the landlord prepares accounts on the cash basis or the accruals basis. The cash basis is the default basis for unincorporated landlords with rental income (determined in accordance with cash basis rules) of less than £150,000. Landlords who do not qualify for the cash basis must prepare accounts using the accruals basis, Landlords qualifying for the cash basis can elect to prepare accounts using the accruals basis, if they prefer.
Under the cash basis, income is recognised when the money is received, not when it is earned. Receipts are income of the period in which the money is received. Consequently, there are no debtors.
This provides automatic relief where rent is not paid or is paid late, protecting the landlord from having to pay tax on money s/he has yet to receive. The landlord only needs to recognise the rental income once it has been paid by the tenant – if the tenant has not paid, the rent due is not taken into account in computing the taxable profits of the property rental business.
Under the accruals basis, rental income is taken into account in the period to which it relates, rather than when the rent is paid. There is no automatic relief if rent is not paid on time as under the cash basis. The rent due for the period is still taken into account when working out the profits of the property rental business under the accruals basis. However, relief is available where the rent remains unpaid and is not recovered, as opposed to being paid late; a deduction is permitted for a debt which is genuinely bad or doubtful.
Landlords who have a mortgage on their rental properties may be able to agree a mortgage holiday with their lender for up to three months where they have been adversely affected by the Covid-19 pandemic.
Buy-to-let mortgages are eligible for a mortgage holiday. However, there is no automatic right to a mortgage holiday and the landlord would need to agree this with their lender. Where a mortgage holiday is taken, the sum owed remains outstanding and interest accrues, although the landlord will not be required to make payments during period of the holiday. At the end of the holiday, the missed payments and interest may be recovered by extending the term of the mortgage or by making higher payments once payments restart.
The impact that a mortgage holiday has from a tax perspective again depends on whether the landlord prepares accounts on a cash basis or under the accruals basis.
From 2020/21 onwards, tax relief for finance costs (such as mortgage interest) on residential properties is given only as a tax reduction at the basic rate, such that 20% of the allowable finance costs are deducted from the tax due (this restriction does not apply to corporate landlords).
Where the cash basis is used, expenditure is only recognised once it is paid. Thus, if the landlord takes a mortgage holiday and no interest is paid, no relief is given despite the fact that interest continues to accrue. Thus, if a landlord only makes nine mortgage payments in 2020/21 rather than 12, relief will only be given for interest element of those nine payments, rather than the interest charged for the full year.
By contrast, under the accruals basis relief is given for the period in which the expense arises rather than when payment is made. As interest continues to accrue throughout a mortgage holiday, the landlord will be able to claim the full tax reduction on the interest accruing in the 2020/21 tax year, even if the interest was not paid in full in the year because the landlord took advantage of a mortgage payment holiday.
Relief for expenses
During the Covid-19 pandemic, landlords remained legally obliged to ensure that their properties continue to meet the required standard. As such, urgent and essential health and safety repairs have to be carried out. However, landlords can agree with their tenants that non-essential repairs are carried out at a later date.
Normal rules apply as regards tax relief for expenses that relate ‘wholly and exclusively’ to the property rental business, with deductions permitted in accordance with the cash basis or accruals basis rules, as appropriate.
SRC-Time are one of the South East’s leading accountancy firms in advising the self-employed and partnerships in all aspects of their tax affairs and we are able to assist in any issue raised above.
Our expert team is available to provide you with advice and can be contacted on 01273 326 556 or you can drop us an email at firstname.lastname@example.org or speak with an account manager to get any process started.