Changes in tax relief for landlords are being introduced in stages until April 2020.
There are ways you can manage your tax bill as tax returns are due on 31st January and with this year’s return, the Section 24 changes will affect landlords.
How tax bills are calculated on rental income has changed.
By April 2020, landlords won’t be able to deduct mortgage interest from rental income before calculating taxable profit. The government introduced a transition period of four years to phase in the new system of calculating mortgage interest tax relief. The amount of mortgage interest tax relief each year will be as follows. In the:
- 2017/18 tax year, landlords can claim 75% of mortgage tax relief
- 2018/19 tax year, landlords can claim 50% of mortgage tax relief
- 2019/20 tax year, landlords can claim 25% of mortgage tax relief
You need to look for efficiencies in the way you operate.
Highly likely, this will have a heavy impact. You may need to adapt your business model to incorporate these losses.
These factors need to be considered when planning the year ahead and allow for changes to your profit margin. What you need to consider before refurbishing your rental property
From April 2020, landlords will no longer be able to deduct the costs of servicing their mortgages from their rental income. Instead, you may receive a deduction for your mortgage interest.
The reduction in the basic rate value (currently 20%) of the lower finance costs
- you cannot deduce costs from rental income in the tax year (this will be a proportion of finance costs for the transitional years)
- + any finance costs that you bring forward as 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.
You can’t use the tax reduction to create a tax refund.
If the basic rate tax reduction is calculated using property business profits or adjusted total income then the difference between that figure and ‘finance costs’ is carried forward to calculate the basic rate tax reduction in the following years. Current buy to let lending rules
Those landlords who pay higher or additional-rate tax will not receive all tax back on mortgage repayments because the credit only reduces tax in line with the basic 20% rate. The changes mean that some landlords will be into the higher tax bracket. Also, the rental income you’ll have to declare will be higher. This will also depend on income from other sources, such as salary or pension.
Private landlords may be able to avoid the hit that these changes will cause by setting up a company that owns their rental properties.
But if you do opt for this path, please take professional advice first. Although you might make a tax saving, there are many other taxes to pay as a business that could increase these initial financial gains and may lead to a lot more paperwork and responsibilities.