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Will I have to pay tax on my letting income?


Not necessarily; it all depends on your personal financial circumstances. For example, if the property being let is mortgaged and the mortgage, together with the related costs of property upkeep, exceed the rent you receive, then it is possible that no tax will be payable.

Letting my property?


Income tax is payable on rent received from a property that is let. Your tax position will determine whether you pay tax or not. All profit you make from letting should be added to your other taxable income for the year, although the financial records for letting must still be kept separately. You have to pay income tax if the total of your taxable income is greater than your tax allowance.

Expenses can be offset against the rent received?


Only those expenses incurred “wholly and exclusively” for the purpose of the let can be offset against your letting income. These might include mortgage interest, general repairs and maintenance, insurance and, of course, your agent’s property management fees.

The records you will need to keep?


You need to keep a record of all income and expenditure incurred in relation to all lettings. The records should show to whom payments have been made and from whom income has been received.

Who is responsible for my tax?


You are. You are obliged to submit all the relevant information to the HMRC annually to account for all your letting income.

Is this the same if I am a landlord living abroad?


As your letting agents, we are obliged to deduct tax from all rental income, unless the HMRC provides us with an approval number from The Non-Resident Landlords (NRL) Scheme. If the property is owned by more than one person, then an approval number will be required for each party, otherwise a proportion of tax will be retained. For more information, visit www.hmrc.gov.uk/cnr/nr_landlords.htm

Tax Changes from April 2017


The tax relief that landlords of residential properties get for finance costs will be restricted to the basic rate of Income Tax, this will be phased in from April 2017.

The amount of Income Tax relief landlords can get on residential property finance costs will be restricted to the basic rate of tax.

The changes will:

  • affect you if you let residential properties as an individual, or in a partnership or trust
  • change how you receive relief for interest and other finance costs
  • be gradually introduced over 4 years from April 2017

Finance costs won’t be taken into account to work out taxable property profits. Instead, once the Income Tax on property profits and any other income sources has been assessed, your Income Tax liability will be reduced by a basic rate ‘tax reduction’. For most landlords, this’ll be the basic rate value of the finance costs.

Who’ll be affected


You’ll be affected if you’re a:

  • UK resident individual that lets residential properties in the UK or overseas
  • non-UK resident individual that lets residential properties in the UK
  • individual who let such properties in partnership
  • trustee or beneficiary of trusts liable for Income Tax on the property profits

For more information check out the HMRC website at https://www.gov.uk/government/news/changes-to-tax-relief-for-residential-landlords?

APRIL 2017 NEW TAX CHANGES


As of 1st April 2017, hundreds of thousands of landlords who currently pay the basic rate of tax will find themselves forced into the higher tax bracket as a result of new restrictions on landlord tax relief. Yet despite this, very few landlords know anything about the changes or how it will affect them.

Currently, mortgage interest payments are one of a number of expenses that landlords can deduct as a business cost. However, once changes are fully phased in by 2021, landlords will no longer be able to deduct mortgage interest payments or any other finance-related costs from their turnover before declaring their taxable income.

How are the changes going to be introduced?


The changes will be phased in over the next four tax years, starting from April 2017, as follows:

2017/18 tax year – Landlords can claim 75% of allowable expenses, and will receive relief at the basic rate (20%) on the remaining 25%;

2018/19 tax year – Landlords can claim 50% of allowable expenses and will receive relief at the basic rate (20%) on the remaining 50%

2019/20 tax year – Landlords can claim 25% of allowable expenses and will receive relief at the basic rate (20%) on the remaining 75%

2020/21 tax year – the switch will be complete, with the only tax relief being the basic rate of 20% on your allowable expenses.

The announcement to cut mortgage interest tax relief in the 2015 Budget came as a surprise to many landlords.

Landlords need to seriously look at how their investments are performing, just as they would if they had stocks and shares. If a stock price is falling, there is a decision to stick it out or sell. In the case of property, of course there is always capital growth, but what about monthly income versus costs?

Landlords will be faced with higher costs. At least at present, interest rates are historically low, but what happens when rates rise?

An example of how a landlord’s tax liability could change over the next 4 years


John is a landlord. He is already a higher rate taxpayer (40%).

John’s Buy-to-let property generates £20,000 per annum.

His allowable expenses (e.g. mortgage interest) total £13,000

Tax year 2016/2017 (Old system) – John pays tax on the profit after all expenses are deducted. £20,000 – £13,000 = £7,000 (John pays 40% tax on £7000 which is £2,800)

Tax year 2020/2021 (New system) – If John’s rental income and expenses remain the same he will pay tax on his total income of £20,000 = at 40% this is £8,000 (less the basic-rate relief of 20% on expenses of £13,000, which is £2600). £8,000-£2600 = £5,400.

What can landlords do?


Landlords should carry out a business review on each of their rental properties. Remember, banks will be more stringent on affordability checks when it comes to buy-to-let mortgages as well, so it’s vital to know how much is coming in and how much will be going out.

Landlords need to list down all their costs (letting agent fees, management fees, maintenance, etc.) It’s extremely important to seek expert advice from an independent tax adviser* who can support a robust and comprehensive financial plan for both the short and long-term.

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