As someone who owns and lets out property, you know that you have certain obligations. Depending on how much rent you get, you might have a requirement to file an Annual Tax Return to report the income and expenses and ultimately pay any tax that is due.
Rental income lower than £1,000 a year?
From 6th April 2017, a property allowance became available if your combined income from UK, overseas and commercial property is under £1,000 (before expenses). There is no income tax to pay and no need to register with HMRC or file Tax Returns
But are you claiming everything you should?
You can deduct expenses from your rental income to reduce the profits. The rule of thumb is that you claim all expenses that have been incurred as a direct result of the rental. Types of expenses are things like:
- any letting agents’ fees
- legal fees for a year or less, or for renewing a lease for less than 50 years
- accountants’ fees
- buildings and content insurance
- interest on any property loans you may have taken out
- money spent on maintenance and repairs (but not home improvements)
- utility bills
- rent, ground rent and service charges
- council tax bills
- any services you pay for, such as cleaning and gardening
- any other direct costs incurred, such as phone calls, advertising or stationery
- mileage to inspect the property carry out repairs or collect rents
- courses that enhance or update your existing knowledge as a landlord
Mortgage Interest Restriction
One of the biggest changes to affect Landlords over the last couple of years is the changes in the way that Mortgage Interest is treated as a deduction against the rental income.
Go back 3 years and you could deduct all Mortgage Interest from your rental but not now. HMRC changed the rules on how much can be claimed and this can be summarised below:
As a result, landlords will no longer be able to deduct all their costs to arrive at their property profits. Instead, they’ll receive a basic rate reduction from their Income Tax liability. The scheme is being introduced gradually, meaning that:
- last tax year, in 2017-2018, the deduction from property income was restricted to 75% of finance costs. The remaining 25% was available as basic rate tax reduction
- in 2018-2019, this changed to 50% finance costs deduction and 50% given as a basic tax reduction
- in 2019-2020, this will change again to 25% finance costs deduction and 75% given as a basic rate tax deduction
- from 2020-2021, all financing costs incurred by a landlord will be given as a basic rate tax deduction
This change in how finance costs are relieved should be closely monitored as it could ultimately result in a Landlord becoming a higher rate taxpayer but only receiving a 20% tax deduction.
And finally – don’t want to pay tax in January?
If you do have a tax liability on your rental profits it may be possible to avoid paying this in January. Conditions apply of course and you have to act fast. Talk to us to find out how!
If you would like taxation advice on your property income, Contact us today to arrange a FREE consultation, we have Chartered Accountants and Tax Advisers in Canary Wharf, Essex and Manchester waiting for your call.