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Income tax essentials for residential landlords

By Jan Moys

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Mark Stemp, Partner and tax expert at Crowe U.K. LLP, talks us through essential income tax considerations for residential landlords. Make sure you're up to speed with this handy overview of the new mortgage relief rules and all the other essential tax details associated with renting out a property.

So you’ve made the decision to rent out a property. Now you need to think about the income tax on your rental profit! To help you navigate your income tax and rental profit, I've provided answers to some of the most common tax questions below.

1) How do I pay the income tax?

You will need to register with HMRC so you are issued with a tax return and to pay the income tax. You will be required to let HMRC know that you have rental income. You usually have until 6 October following the end of the tax year in which you begin to rent the property to do this.

2) How much income tax do I pay?

Any rental income after most expenses will be charged to income tax at your marginal income rate. The marginal tax rate depends on all of your other income. This includes the income from your job and pension.

The tax rates for 2019-20 for most people are currently:

Income: Under £12,500      Tax Rate: Nil
Income: £12,500 - £50,000      Tax Rate: 20%
Income: £50,000 - £150,000      Tax Rate: 40%
Income: Over £150,000      Tax Rate: 45%

Income tax is calculated based on the entries you make on your tax return, which will show your income from all sources including any employment income you may have. Tax is payable under self-assessment on 31 January and 31 July each year.

Non-UK resident taxpayers may have different income tax rules and rates.

3) When do I need to tell HMRC about my annual rental profits?

You will need to report your rental profits to HMRC annually on your tax return. Tax returns are submitted online by 31 January following the end of the tax year in which you received rental income.

4) How to I calculate my rental profit upon which I pay income tax?

You need to calculate your rental profit on a tax year basis, from 6 April to the following 5 April. Rental profit is calculated as the difference between the rental income and most expenses.

The expenses that are deducted from income include repairs, decorating and letting agent fees. There are some complex rules regarding mortgage interest relief deductions.

5) What are the new mortgage interest relief rules?

Landlords of residential property have been facing a restriction of relief on their costs of finance, including interest paid to the bank, from April 2017.

Prior to the change, landlords received relief on the interest they paid on their mortgage to buy their property at their marginal tax rates (see list above).

The new rules mean that from April 2020, relief is restricted to 20% of the interest paid. However, the rules are being phased in between 2017 and 2020 so landlords who are higher or additional rate taxpayers will see their tax liability increase gradually over the next few years even if their profit stays the same.

6) Do I still have to pay income tax if I make a rental loss?

Any losses arising from the rented property are still reported to HMRC on a tax return. They have to be carried forward and offset against any future profits arising from your rental business and cannot be offset against your other income.

For more information on property tax for residential landlords, please contact:

Mark Stemp
Partner, Private Clients

+44 (0)20 7842 7100

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