Eight residential tax issues landlords need to know about: Part One

In today’s housing market, landlords are faced with what seems like more challenges than ever. There’s political and economic doubt, new legislation, rising costs…and yes, new tax considerations. It’s important to review tax law changes on a yearly basis, to ensure every residential landlord complies. In most cases, residential landlords are required to pay tax when they buy a property, when they receive rent, and when they sell. Otherwise, they might face serious consequences. Here are four of the eight major tax issues and changes that residential landlords need to know about this year. Mortgage Tax Relief changes Since 2017, the government has been phasing out the 100% mortgage interest deduction. The amount that landlords are permitted to deduct has been steadily reduced. Starting this April, no mortgage expenses may be deducted. Instead, a tax credit equal to 20% of the mortgage interest will be issued. For the 2019-2020 tax year, landlords can deduct 25% of their rental income, while 75% of their mortgage interest is eligible for the tax credit. But after this April, the 20% tax credit on the total mortgage interest will be the only available deduction. For instance, if there’s a monthly mortgage payment of £600 with £950 per month being collected in rent, the landlord will pay approximately £840-£3,120 in taxes, depending on their tax rate, starting April 2020. Compare this to an annual high-rate tax bill of £1,680 in 2016-2017. This change could potentially push landlords into a higher tax bracket, because they’ll now be reporting their entire rental income, without deductions. Self-Assessment Tax It goes without saying that residential landlords must pay income tax on all rental payment receipts, unless the total earnings for the year do not exceed £12,500. After that, there’s a flat 20% income tax on all earnings up to £50K, then 40% if more than £50K, and 45% if more than £150K. If the annual rental income for a property that is owned by an individual totals £2,500-£9,999 after deductions, or is more than £10K before allowable expenses, it must be reported on a self-assessment tax return. Not much has changed in this realm…except for fewer available deductions, which will, in most cases, increase the amount of income that landlords must report. Allowable Expenses Daily operating expenses for a residential rental property are deductible. Some examples include accountant fees, agent fees, most legal fees, repairs and maintenance (excluding upgrades beyond wear and tear), property insurance, utilities, service charges, grounds rental, domestic items (furniture, carpet, etc.), services (cleaning, gardening, etc.), council tax, and other direct costs. Tax-Free Trading and Property Allowances If the landlord is doing business independently (not as a company), they are eligible for a £1K tax-free trading allowance. If two individuals have interest in a property (but they’re not in a partnership), each person is eligible for a £1K allowance on their share of earnings. The allowances cannot be claimed if the landlord is claiming a tax reducer or is deducting expenses from renting a room in their own home. If a landlord earns less than £1K per year in rental fees, they are not required to report those earnings. Knowing landlord tax Landlords and their accountants who stay up to date with tax obligations, which often change from year to year, will avoid costly penalties and troublesome complications related to everchanging legislation. The rules can be quite complex, but by staying informed of changes that occur year to year, you can learn to leverage maximum tax benefits. Stay tuned. Next month, I’ll be covering four more tax issues that landlords and their accountants need to know about for 2020. Rochelle Trup is the co-founder of Arthur Online