If you are a landlord and about to complete your self-assessment tax return for the 2017-18 tax year, then you need to remember that your property income will be taxed differently to prior years. In addition, there are transitional changes for 2018-19 and 2019-20. The changes were originally announced in the 2015 Budget.
The new tax system and the transitional measures are detailed below together with worked examples for basic rate and higher rate tax payers showing how the changes will impact your income. We have also provided some tips on how to prepare for your self-assessment tax return, and how to find help and support from our team of qualified accountants.
New tax relief given as a reduction in tax liability
Previously, landlords could deduct allowable costs as well as mortgage interest from their rental income, before calculating their tax liability. However, from 6 April 2020 all tax relief for finance costs will be given as a reduction to your tax liability rather than a reduction to your taxable rental income.
This change is being introduced gradually as shown in the table below.
| Tax year | Percentage of finance costs deductible from rental income (under the old system) | Percentage of finance costs qualifying for basic rate tax reduction (under the new system) |
|---|---|---|
| 2017 to 2018 | 75% | 25% |
| 2018 to 2019 | 50% | 50% |
| 2019 to 2020 | 25% | 75% |
| 2020 to 2021 onwards | 0% | 100% |
Transitional tax relief on residential property finance costs
New tax relief restricted to basic rate of tax
In addition to the new tax relief being given as a reduction in tax liability instead of a reduction to taxable rental income, the tax relief is restricted to the basic rate of tax (20%).
How the new tax system will affect your income
If you want to click straight to the worked examples, click here.
Impact on basic rate tax payers
There will be no net effect on income for low income basic rate tax payers as demonstrated in the first worked example below.
However, any finance costs will increase your taxable income which may push you over the basic rate of tax threshold (currently £33,500 for the 2017-18 tax year) and into paying higher rate tax (40%).
Impact on higher rate tax payers
By April 2020 you will only be able to claim half the amount of tax relief on your residential property finance costs compared with what you were able to claim prior to April 2017. The net effect on your income over the transitional years is demonstrated in the second worked example below.
Is there an upside to having a higher taxable income?
A higher taxable income may be good news if you are trying to secure a new loan or mortgage which is based on your total income, or if you are trying to maximise the amount that you are allowed to invest into a personal pension plan and claim tax relief on your pension contributions.
Worked examples
The following worked examples are based on:
- A rental income of £10,000
- Allowable expenses of £1,000
- Finance costs (e.g. mortgage interest) £5,000
Tax calculation for a basic rate tax payer
Tips for preparing your self-assessment tax return
Our top three tips for all residential property landlords are:
1. Keep up to date on tax changes
Tax laws are continually changing, so keeping up to date will help you to plan ahead and complete your self-assessment tax return correctly.
2. Keep documentation for all transactions
Make sure you keep documentation for all rental income and expenses incurred. This will help when preparing your tax return and provide an audit trail if necessary. Remember, you must keep your records for at least 5 years after the 31 January submission deadline of the relevant tax year because HMRC may ask to see and check your records to make sure you’re paying the right amount of tax.
3. Keep your records up to date
By keeping your records up to date and performing regular bank reconciliations you will be able to maintain a good overview of how your rental investment is performing and whether there are any credit control issues. In addition, it will make doing your year end tax return much quicker.
Help with your self-assessment tax return
Our team of friendly accountants are here to help, whether you need a lot or a little help, or you just want peace of mind that you are doing your self-assessment tax return correctly. Our accountants are fully qualified and members of professional associations (e.g. ICAEW and ACCA).
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