Sarah Bradford considers whether there is any help available for landlords affected by the Covid-19 pandemic.
Landlords appear to be among the forgotten when it comes to financial help to deal with the effects of the Covid-19 outbreak.
Self-employed landlords are not eligible for grants under the self-employment income scheme. While a landlord who operates through a company could potentially have been furloughed, this was only an option if the landlord did no work while on furlough, and if properties are rented out this will not normally be possible.
Landlords required to give three months’ notice to tenants
The law provides protection for tenants during the pandemic. On 26 March 2020, the government announced that landlords had to give tenants three months’ notice if they want to end the tenancy. The buffer period applies until 30 September 2020, and both it and the three-month notice period can be extended, if necessary.
This limits the ability of the landlord to evict tenants who do not pay their rent.
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 he or she 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.
Furnished holiday lettings
The Covid-19 pandemic has hit the hospitality and leisure sector particularly hard, and landlords offering furnished holiday lettings (FHL) accommodation may be unable to meet the occupancy conditions.
The third test (i.e. the lettings condition) requires that the property must be let commercially as furnished holiday accommodation to the public for at least 105 days in the year. Let’s of more than 31 days are not counted unless the let exceeds 31 days as a result of unforeseen circumstances. This may potentially include tenants self-isolating in the property because they were unable to return home. Lets to family or friends on a non-commercial basis are also ignored.
If this condition is not met in 2020/21 as a result of the pandemic, all is not lost and there are two routes by which it may be possible to reach the required occupancy threshold – an averaging election or a ‘period of grace’ election.
An averaging election can be used where a landlord has more than one holiday let and one or more of the properties does not meet the letting condition. Instead of applying this test on a property by property basis, it can be applied by reference to the average rate of occupancy across all properties let as FHLs. Thus, the test is treated as met if on average the holiday lets are let for 105 days in the tax year. An averaging election may help landlords with mixed portfolios including some winter holidays lets as well as those that are popular in the summer.
A period of grace election can be used where the landlord genuinely intended to meet the letting condition but was unable to. The Covid-19 pandemic is a prime example of where this may be the case, and offers landlords a potential lifeline.
To make a period of grace election, the pattern of occupation and availability conditions must be met. Also, the letting condition must have been met in the year before the first year in which the landlord wishes to make the period of grace election. If the letting condition is not met again in the following year, a second period of grace election can be made. However, if the test is not met in year four after two period of grace elections, the property will no longer qualify as a furnished holiday letting.
A period of grace election can be made either on the self-assessment tax return or separately (either with or without an averaging election). A period of grace election for 2020/21 must be made by 31 January 2023.
Landlords should check they are taking advantage of the reliefs available to them where they have been adversely affected by the Covid-19 pandemic.