Meg Saksida covers the issues that need to be considered when ceasing to let out rental properties.
Landlords have had a rough ride in recent years. For example, changes in mortgage relief, stamp duty land tax (SDLT), lettings relief and in the timing for payments for capital gains tax (CGT) purposes on residential properties have made being a landlord a lot less lucrative than it once was.
On top of this, with the financial pressure of the Covid-19 pandemic causing many tenants to struggle to pay their rent, there may be some landlords who are finding the ‘letting game’ not as beneficial as it once was, and have therefore decided to cease trading.
When has your rental business ceased?
HMRC consider that the date a rental business ceases is a question of fact. It will be the date when the last rental property in your portfolio is sold or the date it starts to be used for another purpose if not sold.
For example, suppose that a landlord has two homes in his portfolio of rental properties and sells one and gifts the other to his son; the business has ceased on the later date of either the sale or the gift. However, If the landlord purchased another rental property around the same time, the business of renting will not have ceased. It will continue, just with a different portfolio of homes.
In order for the business to cease, all the business activities related to the receipt of rental income must have ended. This includes collecting rent, advertising for tenants, repairing the properties, paying the council taxes on the properties, and so on.
Is it a new business or a continuation of the last one?
After having made the decision to stop a rental business, a landlord may change their mind and decide to start up property letting again.
Whether the letting business was dormant or permanently ceased and a new business taken up will depend on a number of factors, including whether the properties or portfolio were different before and after, the length of time between the businesses, how the proceeds from the business sale were used in the intervening period and any changes in the kind of activities performed by the landlord.
For example, if the landlord had one residential property when they ‘ceased’ the property business, and a year later this same renovated property was put back onto the rental market, with the same landlord, performing the same activities in their business, it is more than likely that the business merely lay dormant.
However, if the landlord started up two years later, having run a different business in the intervening period, with a completely different type of letting in a different sector, or a different location or with a different quality of rental property, and the landlord was performing very different activities, it is more likely that the original business ceased and the new letting was indeed a genuinely unique new rental business.
Why is it important?
The date when the rental business ceases is important for tax purposes, because of the treatment of any unrelieved losses. If there were unrelieved losses in the ceased business, these are only allowed to be carried forward and relieved against future profits of the same business.
Therefore, if the loss-making business ceases and a new rental business starts at a later date, the unrelieved losses from the first business cannot be relieved against profits of the second business.
Taxing receipts and expenses made before cessation
When ceasing a property business, the final tax year’s net income will need to be calculated. All rental income and associated expenses for the tax year will need to be included as long as they are ‘wholly and exclusively’ related to the letting business.
After the last tenant, there may be expenses associated with cleaning carpets and curtains, painting and gardening, or generally making the property ready for sale or another use. As long as these costs are not capital in nature, they can be deductible against the rental income for the tax year.
If the costs are capital, they will be deducted as enhancement expenses in the CGT calculation on the eventual sale of the property.
Taxing receipts and expenses made post-cessation
Special rules apply to business receipts and expenses arising after a letting business has ceased, if they are not already taxable or deductible under any other tax.
For example, a landlord that had a tenant with rental defaults may receive some of these rental payments after the closure of the letting business. Similarly, there may be post-cessation expenses, such as forgotten utility payments or costs for bad debt recovery.
Because the business has ceased, there is no tax computation for the ‘business’. As a result of this, the legislation provides where to allocate these receipts and expenses depending on the situation.
If there are post-cessation receipts, the landlord can deduct the expenses from the receipts. The net figure will be taxable on the landlord. This will not be possible for items of expenditure that have already been relieved in the business previously. For example, a bad debt written off in the business prior to the cessation where the tenant pays after the cessation; the business will have already had tax relief for the write off of the bad debt, so the receipt will be fully taxable.
If the expenses exceed the receipts, or if there are no receipts and only expenses, for certain specific post-cessation expenses the landlord can claim for the expenses to be offset against his total income. If the person does not have enough income, the expenses can be offset against any capital gains they may have. This is only available for ‘qualifying payments’ or a ‘qualifying event’. A list of such payments and events can be found in HMRC’s Business Income manual at BIM90110 and BIM90115.
If it is neither a qualifying payment or event, the only relief is to carry the expense forward against future profits from the same business, and if there will be no future profits in that same business any tax deduction will be lost.
Selling or keeping the property
If the property is being sold at a gain, the landlord may need to consider CGT on any periods of occupation that were not covered by other CGT exemptions.
The proceeds will normally be the amount of the consideration for the CGT computation unless it has been sold at ‘other than a bargain at arm’s length’ or gifted, in which case the consideration will be the market value. Incidental costs of disposal such as estate agents’ fees and auction fees can be deducted. This will be compared with the cost; the historical cost, the incidental costs of acquisitions (which includes SDLT) and any enhancement expenditure. If originally inherited, this will be the probate value.
Often landlords let out former main residences. If the property has ever been the principal private residence of the landlord, all actual and deemed periods of occupation and the last nine months will not be chargeable.
If the property is being sold, due to recent changes in legislation gains on residential properties generally need to be reported and paid within 30 days of the completion of the property post 6 April 2020. However, HMRC have confirmed that late filing penalties will not be charged for disposals made from 6 April and 30 June 2020 due to allowing a time of adjustment and familiarisation.