Sarah Bradford looks at when landlords can secure tax relief should they find themselves in the unfortunate position of having to evict tenants.
Over the last few years, the property climate has become increasing hostile towards buy-to-let landlords. Hard on the heels of a raft of unfavourable tax changes, the Renters’ Rights Bill will give renters greater rights (and landlords fewer rights) once it becomes law.
Getting the property back
As a result, many landlords have now decided that the time has come to sell up. However, a lack of affordable housing and a shrinking rental market mean that despite having validly issued a ‘section 21’ notice, an increasing number of landlords are finding themselves with tenants who refuse to leave; a situation exacerbated by councils often advising tenants to stay put.
Evicting tenants is a stressful and costly process for a landlord, and it is important that the correct procedures are followed. This is important as the landlord may be guilty of harassment should they fail to follow procedures. The correct procedure depends on where the property is locatedand the type of tenancy. The information in this article reflects the costs of evicting tenants in England. Different procedures and costs apply to properties in other parts of the UK.
In England, an assured shorthold tenancy may be a periodic tenancy which runs week by week or month by month or a fixed-term tenancy which runs for a period of time.
Tenants are not expected to move out when a fixed-term tenancy comes to an end; rather, it reverts to a periodic tenancy. If the landlord wishes to get their property back at the end of a fixed-term tenancy, they will need to issue a ‘section 21’ notice. Landlords who wish to get their property back because the tenants have breached the tenancy agreement will need to issue a ‘section 8’ notice. If these are issued on the landlord’s behalf by a third party, such as a letting agency, there will be a fee to pay.
Costs of eviction
In the event that the tenants do not move out by the date specified in the notice, the landlord will need to obtain a possession order. If the tenants owe rent and the landlord wishes to claim this, they will need to apply to the court for a standard possession order. This can be done online and costs £404. If the landlord is unable to use the online service, they can send the form by post to their local court dealing with housing.
If the landlord is not claiming rent, they can apply for an accelerated possession order. This should be a quicker process as it does not require a court hearing. This too costs £404. Unlike a standard possession order, an accelerated possession order claim cannot be made online. The form must be completed and sent by post with the relevant enclosures to the local court dealing with housing.
A landlord will usually incur costs on top of the court fees when applying for a possession order. Where a solicitor is used to file the claim, there will be legal fees to pay. There will also be ancillary costs, such as postage where the form is sent by post and the cost of printing and photocopying the form and enclosures.
The issue of the possession order may not be the end of the matter. If the tenants fail to move out of the property by the date specified in the possession order, the landlord will need to apply for a warrant of possession, either on form N325 or, where the possession claim was made online, via the Possession Claims Online service. This costs a further £148. Again, there may be legal costs to pay, as well as postage, where a paper form is submitted.
Once the warrant has been issued, the landlord will be sent notice EX96, which will state the date of the eviction. It is important that the landlord returns this form to confirm the eviction. The landlord may opt to transfer the warrant to the High Court to secure a writ of possession. This will enable a High Court enforcement officer to evict the tenants, which may result in a faster possession. This costs £123 (plus any associated legal fees), but may be worthwhile (e.g., if the landlord is waiting on vacant possession to exchange contracts on a sale of the property).
Keeping a record
It is important that the landlord keeps a record of the costs incurred in evicting the tenants, together with the supporting evidence.
Tax relief
Legal and professional costs can be either ‘capital’ or ‘revenue’ items – they take on the nature of the item to which they relate. If the costs are incurred in relation to something of a revenue nature, the associated legal and professional costs are revenue items. However, if they relate to a capital item (e.g., the purchase of a property) they are legal items.
To the extent that legal and professional costs are revenue items, as long as they are incurred wholly and exclusively for the purposes of the property rental business, they can be deducted in calculating the taxable rental profit. Consequently, it is necessary to ascertain whether the costs of evicting the tenant are a revenue expense or a capital expense. Here, it is necessary to look at the reason for the eviction.
In its Property Income Manual at PIM2120, HMRC states that the costs of evicting an unsatisfactory tenant to re-let the property are a revenue expense. Accordingly, the court costs and any legal costs of evicting a tenant in breach of the tenancy notice who has refused to leave by the date on the ‘section 8’ notice would be deductible in calculating the taxable rental profits, as would those under a ‘section 21’ no-fault eviction where the landlord is to relet the property. Any associated revenue costs (e.g., postage, printing, photocopying) would also be deductible in computing rental profits.
However, where the purpose of the eviction is to secure vacant possession in order the sell the property, the associated legal and professional costs would be a capital item as they would be a cost associated with disposing of the property. This would be the case if the landlord had to evict tenants who failed to leave by the date in a ‘section 21’ notice which had been issued because the landlord was selling the property. Here, relief is given through the capital gains tax system and deducted in calculating the capital gain or loss on disposal. Any further costs incurred in securing vacant possession would similarly be deductible in calculating the gain or loss on disposal.
Recovering costs
Most landlords will seek to recover the costs of eviction from the tenant. Where they are successful, they are not able to also claim tax relief for those costs. However, if the amount recovered is less than the amount that they spent, they can claim tax relief for the shortfall, either in calculating the rental profit or the capital gain or loss, as appropriate.
If the landlord is able to recover costs under an insurance policy, the insurance proceeds must be taken into account as well as the costs.
In the event that the tenants have unpaid rent, if this is recovered, either from the tenants or under an insurance policy, the recovered rent or insurance proceeds must be taken into account in calculating the taxable rental profit.
If the tenants have not paid the rent due and this is not recovered, if the landlord uses the cash basis to prepare accounts, it is simply ignored; as no rental income is taken into account, bad debt relief is not in point. However, where the landlord prepares their accounts under the accrualsbasis and the rent due for the period has been taken into account, the landlord will be able to claim bad debt relief to the extent that this is unpaid.
Practical tip
Landlords who find themselves in the difficult position of having to evict a tenant will need to be clear on the reason for the eviction in order to ascertain whether the associated costs are revenue or capital, so that tax relief for any unrecovered costs can be given in the correct way.
