This article outlines the basic principles applying to a landlord renting out a residential property. It is not intended to cover commercial properties or Furnished Holiday Lettings, which have some different rules. If you are a landlord letting a residential property, you need to be aware of two different costs that you may incur –
- Capital costs
- Revenue costs
These are the costs you incur when you (a) buy the property and (b) improve the value of the property. You cannot offset Capital Costs against the rental income you receive each year but you can offset them against any capital gain you make when you sell the property.
When you buy your property, the purchase price, legal & professional fees and renovation costs to alter or improve the property are very likely to be deemed Capital Costs. You should carefully file away all the original paperwork until you sell your property.
These are the ongoing costs you incur to enable you to keep renting out the property. These include (but are not restricted to):
- Mortgage interest only (not the capital element) of your repayments
- Repairs to restore property to its former state and to maintain it
- Management & professional fees such as letting-agency fees & accountancy fees
- Council tax paid on behalf of a tenant or empty property paid by the landlord Insurances and safety-check certificates
- Business mileage in connection with the property .
Currently a landlord can claim the whole of the interest element against the rental income they receive from their tenant, regardless of whether the landlord is a basic-rate (BR) 20% or higher-rate (HR) 40% taxpayer. The landlord will be taxed on the profit from the property after the deduction of the mortgage interest element of the mortgage payments that year, based on whether the landlord is a basic-rate taxpayer at 20% or a higher-rate taxpayer at 40%. In 2015 the then chancellor, George Osborne, considered that this was unfair on the basic-rate taxpayer and removed the tax relief on mortgage interest from the profit calculation altogether. Instead he gave a flat 20% allowance on the mortgage interest suffered that year after the profit had been calculated. This effectively reduces the higher-rate taxpayer’s relief on mortgage interest suffered to be the same 20% tax relief as the basic rate taxpayer.
The government felt this should implemented over four tax years:
|Tax Year||Percentage of finance costs deductible from rental income (BR) 20% (HR) 40%||Percentage of basic rate tax reduction – 20% relief only|
|2017 to 2018||75%||25%|
|2018 to 2019||50%||50%|
|2019 to 2020||25%||25%|
|2020 to 2021||0%||100%|
This will significantly increase the tax liability of the higher-rate tax payer over the next four years.
Beneficial Ownership refers to the person who owns or receives benefit from the property. A husband and wife, who jointly own a property, are deemed to be 50/50 owners i.e. they are taxed equally on the rental profits from the property and the capital gain when the property is sold. Some taxpayers have elected to adjust beneficial ownership for tax planning reasons. For example, one may be a basic-rate (20%) tax payer and the other may be a higher-rate (40%) taxpayer. Thus, less tax will be suffered on annual rental profits by the basic-rate tax payer and similarly the higher-rate taxpayer will suffer 28% capital gains tax (CTG) after annual CTG allowance, whereas the lower-rate tax payer will suffer only 18% CTG after the annual CGT allowance when you sell your property. Should you decide to vary ownership of your property, HMRC Property Form 17 is used to register the election. However, I strongly advise you to get professional help from your solicitor or accountant to execute this properly and fully understand all the consequences. There are also restrictions on the number of times you can make the election.
Making Tax Digital (MTD)
Landlords with property turnover of more than £10,000 pa will be subject to the new HMRC (MTD) rules.
- Annual property turnover more than £85,000 pa (MTD) will apply from 6 April 2018
- Annual property turnover of £85,000 pa or less (MTD) will apply from 6 April 2019
Under (MTD) rules landlords will be expected to file their accounts quarterly on HMRC compliant software or apps, with an annual declaration.
Accounting and taxation rules are complex and must be applied correctly. This article is only intended to create awareness of the general principles of the topic, there may be other rules not mentioned in this article that may apply to you. You should always seek professional advice prior to acting.
Burton Mail – Wednesday 10 January 2018. In the next article we will look at Making Tax Digital.