While most people spend the beginning of the new year (at least for the first month, anyway) hitting the gym, abstaining from alcohol, and eating healthily to try and counteract the Christmas diet of chocolate and cheese boards, the new year is also the time to submit your Tax Returns to HMRC.
Tax probably isn’t something you will have factored into your ‘new year, new me’ schedule but with the January 31 deadline just three weeks away, it’s important that landlords submit these important documents on time to prevent a fine from HMRC.
How can landlords submit their tax returns?
Ensure you are already registered with HMRC for self-assessment and have received your Unique Taxpayer Reference (UTR). If you aren’t sure what your UTR is, 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 has fallen progressively, until it finally reaches zero. When 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 long is the transition period?
The government introduced a transition period of four years to phase in the new system of calculating mortgage interest tax relief.
For 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.