ARE YOU UP TO DATE WITH THE NEW CHANGES TO LANDLORDS TAX RELIEF?
Since the 6th April 2017, HMRC have been phasing out new rules that restrict the amount of tax relief some landlords can claim on their rental income, meaning landlords may see a rise in their tax bill. Since then the amount of money landlords could write off for tax purposes has been reduced by 25% each year.
Whilst you are still able to deduct some of your finance costs when you work out your taxable property profits during the transitional period, these deductions will be gradually withdrawn and replaced with a basic rate relief tax reduction.
What are the changes?
Prior to April 2017, Landlords could deduct mortgage interest and other allowable expenses from their earnings, before calculating their tax liability.
The new changes mean landlords will be required to declare all their rental income and pay tax on the full amount. The Government has been phasing in these new rules over a 4-year period and plans to have this fully in place by April 2020.
How is the tax reduction worked out?
Prior to April 2017 Landlords were able to deduct mortgage interest payments from their rental income to gain tax relief. By April 2020 Landlords will no longer be able to deduct mortgage interest payments from their rental income and instead it is being replaced with a basic rate (20%) tax reduction on the lower of the following:
finance costs – costs not deducted from rental income in the tax year (this will be a proportion of finance costs for the transitional years) plus any finance costs brought forward
property business profits – the profits of the property business in the tax year (after using any brought forward losses)
adjusted total income – the income (after losses and reliefs, and excluding savings and dividends income) that exceeds your personal allowance
Here is an outline of how the new system is being phased in:
In 2017-2018, the deduction from property income was restricted to 75% of finance costs. The remaining 25% is available as basic rate tax reduction.
In 2018-2019, property income was restricted to 50% finance costs deduction and 50% given as a basic tax reduction.
In 2019-2020, the deduction from property income (as is currently allowed) will be restricted 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
Who will be affected?
Landlords who let residential properties as an individual (UK resident who has property in the UK or overseas and non- UK resident who has property in the UK), Individuals who let properties in a partnership or trust will be affected by the new changes.
Landlords of furnished holiday lettings and those who let property through a limited company are not currently affected.
You will not need to pay income tax if your combined property income (before expenses) is less than £1000.
If you are unsure whether the new changes will effect, you then it is important for you to seek professional advice. The new system could see Landlords being pushed into the higher tax bracket because they will need to declare the income that was used to pay the mortgage on their tax return.
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