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Capital Gains Tax  •  Coronavirus Advice  •  Personal tax  •  Property  •  tax returns

5 ways landlords can offset financial losses due to Covid-19

By RJP LLP on 22 September 2020

Although there have been a number of schemes available to support taxpayers through the Covid-19 pandemic, some have been more generous than others and one group of taxpayers that has not seen any specific support is private landlords. Unless, that is, they operate their business through a limited company; there was a caveat to this support too, because the qualifying criteria required that claimants should not be doing any work for their employer whilst claiming. This would have closed off that option for many landlords continuing to rent property to existing tenants, even where rental income was reduced. Landlords were also not entitled to claim under the Coronavirus Self Employed Support Scheme unless their rental business qualified as a trade.

As a result some landlords have faced a difficult time, with potential losses due to tenants being unable to pay rent or requesting reduced rent. To protect tenants, the government introduced a special three-month notice period for landlords wanting to end tenancies, but this also meant landlords were unable to evict tenants who were not paying their rent. Clearly there are humanitarian reasons for this, but for landlords facing financial losses as a result, it remains a difficult situation.

Here are 5 ways that landlords can make the best of what might have been a bad financial year by limiting their tax liabilities.

  1. Claim tax relief on losses

To support landlords who have tenants unable to pay their rent it is possible to claim tax relief on losses incurred. The exact tax treatment depends on the accounting system in use and whether the accounts are prepared on a cash or an accruals basis.  If a cash basis can be used, income is only recognised when it is received, so whilst there might not have been any income for a period and a dip in profits, there is also a reduced tax liability. It means the landlord would not have to pay tax on income they have not received. Under the accruals basis, the situation is more complex and whilst tax relief is not automatic it is possible to make allowances for bad debts. Either way it means that any tax payable will be reduced.

  1. Ask for a mortgage holiday 

Just like private homeowners, landlords with a mortgage can ask their lenders for a 3-month mortgage holiday if their income has been adversely affected. This can allow for a pause in the payment schedule, although interest will continue to accrue. As with claiming losses, the way this could affect taxes depends on whether the accounts are compiled on a cash or accruals basis.

  1. Claim tax relief for expenses 

Regardless of whether tenants can pay their rent due to the Coronavirus pandemic, properties still need maintaining. It is possible for non-essential repairs to be postponed but essential repairs will need to be completed. These expenses can be offset against income in usual way and losses can also be claimed where applicable.

  1. Negotiate a grace period for missed occupancy targets

Landlords with a furnished holiday let ordinarily need to meet set targets for rental occupancy and availability. We have highlighted the requirements to qualify for furnished holiday let tax treatment in another article. Since the Covid-19 pandemic hit the travel industry badly due to lockdown, these occupancy conditions may be relaxed for tax purposes. In addition, under normal circumstances, a rental period should not exceed 31 days to be counted, but if tenants were isolating in the property this may be allowed.  To get a dispensation in place will require negotiating an arrangement with HMRC, similar to Time to Pay, and known as a period of grace.  Ordinarily, the qualifying conditions will need to have been met in previous years for this to be accepted by HMRC.

  1. Use an averaging election for furnished holiday lets

For landlords with multiple holiday lets that do not meet occupancy conditions, there is also an option to use an averaging election. Here occupancy levels across all the properties in a portfolio can be applied instead, to demonstrate that the properties are rented for 105 days in a tax period. This can only be used for a portfolio of furnished holiday lets rather than a combination of different rental property types.

Do you have buy-to-let or furnished holiday let property and have seen your revenue affected by Covid-19? We can help you make the best of a difficult situation by claiming for losses and available tax reliefs. Find out more by emailing partners@rjp.co.uk

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31 December 2020 - Review disposals of chargeable assets to avoid a possible CGT increase

Capital gains tax is due to be reviewed by the government and if a CGT rise is announced, the new rates may become effective from the next tax year on 6 April 2021. Take advice now if you are thinking of selling property or have other assets giving rise to a capital gains tax liability.