Submitting your tax returns over Christmas?
Last year over 16,000 people submitted their tax returns over the Christmas period according to HM Revenue and Customs (HMRC). Whilst tax isn’t the first thing that springs to mind when the holiday season approaches, many find the break an ideal time to submit their returns ahead of the January 31 deadline.
How can landlords submit their tax returns?
You should have already registered with HMRC for self-assessment and received your Unique Taxpayer Reference (UTR). If you’ve lost your UTR, there’s guidance on how to find it here. You can then file your self-assessment tax return via https://www.gov.uk/log-in-file-self-assessment-tax-return by 31st January.
Recap of the Section 24 change
The introduction of Section 24 or the so called ‘Tenant Tax’ is a reduction of the mortgage tax relief landlords have previously received, and means that landlords will need to adapt the way they calculate their tax bills. Between April 2017 and April 2020, the 100 percent tax relief on mortgage interest will fall to 75 percent, then 50 percent, then 25 percent and finally zero. Once the relief hits zero, it will be replaced with a 20 percent tax credit that is applied to the taxable profits that landlords make on their properties.
How to calculate your bills?
The way of calculating tax bills on rental income has changed, and the 2017-18 tax return will be the first time landlords will need to take Section 24 in to account when calculating their tax bill. Instead of receiving 100 percent mortgage tax relief, you will need to calculate your taxes based on 75 percent relief.
By April 2020, you won't be able to deduct any of the mortgage expenses from rental income to reduce your tax bill. Instead, landlords will be able to claim tax relief at 20% basic rate.
While landlords who are in the higher and additional rate tax brackets will see the greatest change, basic rate taxpayers may also be affected. Those with income close to the threshold could find that they have been dragged into the higher-rate tax bracket since the tax relief will be applied after profits are calculated.
How long is the transition period?
The government has 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 will each year:
In the 2017/18 tax year, landlords can claim 75 percent of mortgage tax relief
In the 2018/19 tax year, landlords can claim 50 percent of mortgage tax relief
In the 2019/20 tax year, landlords can claim 25 percent of mortgage tax relief
What happens from April 2020?
From April 2020, landlords will no longer be able to deduct their mortgage costs from their rental income. All of the rental income landlords earn will be taxable, and instead you will receive a 20 percent tax credit for your mortgage interest, meaning that the final tax bill will be reduced by 20% of your interest.
How can private landlords avoid the hit?
Looking ahead for future tax years, private landlords may be able to avoid the hit that the introduction of Section 24 will cause by setting up a limited 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 negate these initial financial gains, as well as a lot more paperwork and responsibilities.
We hope the advice given will be useful when you’re submitting your tax returns. If you would like to develop your tax knowledge, we offer a Landlords Tax & Capital Gains Tax (CGT) course. Happy holidays!
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