Be prepared for Self-Assessment and the property tax changes
It’s been hard for buy-to-let landlords to keep pace with all the changes in property tax in recent years. This is especially the case with how mortgage interest payments can be treated. Before April 2016, you could offset all the mortgage interest you paid against your rental income. You can no longer do this.
Here, we show you how to calculate your rental profits for income tax purposes, and how the new tax relief on mortgage interest payments affect buy-to-let landlords.
How do you calculate your taxable rental income?
The principle of calculating your rental income for tax purposes is the same as it has always been:
- Total your rental income
- Total your allowable costs/expenses
- Deduct the total of your allowable expenses from the total of your rental income
If you own a portfolio of properties, you can add all your rental income together and all your expenses and costs to work out an overall figure.
What is rental income?
For most landlords, rental income is simply the single payment that a tenant makes to rent your property. However, there are also other income streams you may have which are also classed as rental income. These include, but are not limited to:
- Any utility costs paid to you to cover utility bills paid by you
- Any charges you make to cover the service charges levied on the property
- Any fees you charge for parking or storage
- Any charges you make for rental of furniture
Basically, the taxman covers himself against landlords who try to work the system by charging a lower rent and then receiving extra money for services of items provided.
What are allowable expenses/costs?
Anything that you pay out can be claimed against your rental income, providing the cost is incurred “wholly and exclusively for the purpose of renting out your property”. So, if you are visiting your property, you can claim mileage from your home to the property. You can’t, however, claim for the 60-mile detour you made on the way so that you could visit your auntie in hospital.
The following are the most common items you can deduct from your rental income:
- Property management fees
- Costs of repairs and maintenance (provided they are not classed as improvements)
- Water rates, council tax, gas and electricity
- Accountant’s and legal fees (with some restrictions)
- Ground rents and service charges
- Landlord insurance
- Wages and fees of people you employ (e.g. maintenance technicians)
- Stationary, phone, and advertising costs
- Travel expenses/vehicle costs when visiting your buy-to-let property
About mortgage interest payments
Before April 2016, you could also deduct the full amount of your mortgage interest payments as an allowable expense. However, this is being phased out. Instead, you can:
- Offset a portion of your mortgage interest payments against your rental income
- Claim tax relief on the balance of your mortgage interest payments – and this relief is limited to the basic rate of income tax (currently 20%)
If you’re a higher rate taxpayer, this will mean you pay more tax – effectively reducing your net profit.
By 2020/21, you will be limited to basic rate tax relief on 100% of your mortgage interest payments. This year, 2018/19, you will be able to offset 50% against your rental income while claiming basic rate tax relief at 20% on the remaining 50%.
Calculating the income tax that you owe on your rental income
You will need to complete a Self Assessment to properly assess how much tax you should pay on your rental income, but the following example will give you some idea:
You are a buy-to-let landlord with rental income of £15,000 in 2018/19. You pay property management costs of £2,000. Your other costs, including maintenance, total another £2,000. You pay mortgage interest of £6,000. You are a higher rate taxpayer.
The following table shows your tax liability for 2018/19, and how this will change when the tax relief on mortgage interest rule is fully phased in in 2020/21:
| Item | 2018/19 | 2020/21 |
| Rental income | £15,000 | £15,000 |
| Property management | £2,000 | £2,000 |
| Other costs | £2,000 | £2,000 |
| Mortgage interest payments | £3,000 (50%) | £0 (0%) |
| Net rental income (a) | £8,000 | £11,000 |
| Income tax @40% (b) | £3,200 | £4,400 |
| Mortgage interest applicable to tax relief (c) | £3,000 | £6,000 |
| Tax relief at 20% (d) | £600 | £1,200 |
| Total tax due (d) (= b – c) | £2,400 | £3,200 |
| Net rental profit (a – c – d) | £2,600 | £1,800 |
There you have it. If you’re a higher rate taxpayer, the changes to mortgage interest tax relief will already have started to bite into your net profits. By 2020/21, this change will take a bigger chunk. The changes to the way that your net rental income is calculated may also push you into a higher tax bracket.
If you haven’t done so already, you should sit down with an accountant and figure out the exact impact on you. The above is an example for illustration only. Your unique financial circumstances will need to be considered when planning a strategy to mitigate your tax liability on your rental income.
If you’ve got a question you’d like answered, get in touch with the team at Ezytrac on +44 0 1522 503 717. It’s unlikely that you’ll be the only one asking, and the answer could help other landlords up and down the country.
Live with Passion,
Brett Alegre-Wood