From a purely financial perspective, the government has ruled out rent holidays during the Covid-19 epidemic. At the same time, landlords are being called upon not to evict tenants for at least a three-month period.
Rent should still be paid, but the reality is landlords are already missing rent cheques, and just like other businesses – landlords need to batten down the hatches too.
With all of this going on, sorting out your taxes may seem like an afterthought.
If you make no money – you pay no tax. At least that’s how it used to be before Section 24.
Fortunately, the government are allowing all landlords who made a tax Payment on Account in January 2020 to kick the can down the road, with the option for an interest free deferral for your second 19/20 tax year payment. The payment due by July 31st 2020 can be pushed back until January 31st 2021. This is an especially welcomed move by the government whilst cash-flow is tight, but it does mean landlords may need to plan further into the future than they might normally do.
There have also been calls – although so far these have fallen on deaf ears – for the chancellor to delay the final stage of Section 24 which came into force from April 6th 2020. Such news would be welcome but has not yet been forthcoming and does not seem likely.
Those that currently have a Section 24 issue then will still see this compounded in their January 2021 tax bills as the payment on account tax escalator effect continues to build.
As an example, let’s look at a landlord taking advantage of the payment deferral, with £160,000 Gross
Rental Income, £30,000 Expenses and £70,000 in disallowed Finance Payments and no other income.
This landlord will need to find £27,070 in January 2021, and £12,250 in July 2021. A total of £39,320 which is almost double the £19,200 paid in 2019.
A reduction in rent receipts will mean less tax due of course, but mortgage payments still represent ‘profit’ without income. Some BTL lenders are offering 3-month payment holidays, and landlords should investigate all possibilities to improve cashflow though be aware the knock-on effects could see an increase in tax owed for January 2022.
Businesses across the world right now are being painfully reminded that cashflow is king, and of course taxes are a critical part of your finances. For many landlords, accounting for tax on property profits in personal names is no longer an option and putting off a decision on restructuring your business for too long could prove costly in the long term.
Portfolio landlords in particular should still seek advice. Becoming tax-efficient now could lead to a significant reduction in payments due in January. Such advice should also be tax deductible.
In a black swan event like this, the government are rightly backing British business. Unfortunately, much of this support does not apply to landlords, although there are options something we can look at in more detail in another article as this develops.
You can also find this article published on the Property Notify Website
Chris Bailey is a Chartered Accountant and experienced business owner who has been involved in the property industry for almost 30 years. He runs five successful accountancy practices, a tax advisory company and a property Capital Allowance business.
Co-Founder and Group Director of Less Tax 4 Landlords, Chris also has over ten years experience of Capital Allowance claims and extensive knowledge of the complexities and challenges of property tax law.