Landlord Tax Relief for Beginners: Rules & Changes for 2020

Landlord Tax Relief
Image by Steve Buissinne from Pixabay

If you’re lucky, you might have an accountant filing your tax return for you. But if like many landlords you’re the bookkeeper and accountant (we feel your pain), it’s important that you understand the rules and changes for landlord tax relief in 2020.

It’s no secret that landlord tax can be complicated, and there’s a lot to get your head around as a new landlord. When you’re busy fitting out your property, obtaining the right documentation and finding tenants, it’s tempting to leave the fun job of tax till last. Yet it’s a crucial topic to get your head around if you want to make sure you’re maximising your profits.

This article is a guide on landlord tax relief for beginners, outlining rules for this year’s return, and some of the biggest changes for 2019-2020.

What taxes do landlords pay?

Private landlords pay tax when they buy a property (stamp duty), when they rent it (income gains tax) and when they sell it (capital gains tax). Landlords who manage their properties through a limited company pay corporation tax.

If you’re interested in capital gains tax, stamp duty, capital gains and corporation tax, we’ll be covering that in more detail another time. For now, we’re going to concentrate on income gains tax and the relief that’s currently available.

Who pays tax on a property?

The person liable to pay tax is the property owner or owners. It doesn’t matter if the money isn’t touching your bank account, if the mortgage is in your name then you’re responsible for paying any tax. This applies even if someone else manages the property for you.

Income tax

Landlords are entitled to £1,000 tax-free property allowance. If you’re earning more than £1,000, you have to tell HMRC by filing a tax return (if you’re earning less, you don’t have to file a tax return and you can stop reading now).

The amount or rate of income tax you’re eligible to pay depends on what you earn. This tax year 2018-2019, the amount of tax-free income you’re allowed is £11,851. If you earn £11,851 to £46,350 then you pay a basic tax rate of 20%. Anything over £46,350 up to £150,000 incurs a £40% tax. Earnings of over £150,000 are taxed at 45%.

If you own several rental properties, profits from all the properties are combined into one figure.

Relief: You can sometimes transfer allowances within a marriage or civil partnership, or in a business partnership. As long as it’s clear where all the money is going!

As a self-employed landlord, you’re also entitled to a £1,000 trading allowance. You’re not entitled to this if you’re a limited company. The trading allowance is usually only used by low-income businesses. If you use it, you can’t claim for any other business expenses. Therefore, it’s only really applicable if you’re earning around £1000-£2000 from your property.

Property expenses, what you can claim and what you can’t

What you can claim

Generally, you’re allowed to claim for anything you exclusively purchase to help you rent out your property. But this doesn’t mean everything is covered. It usually pertains to the general maintenance of the property and any necessary improvements e.g.:

  • General maintenance of the property and grounds including repair costs
  • Insurance (landlords’ contents, etc)
  • Cost of services for maintenance (cleaners, gardeners, ground rent)
  • Agency and property management fees

What you can’t claim

The rules around exactly what you can and can’t claim can be complicated. We’ll be covering this in more detail in an upcoming article.

Changes in effect from 2020

Changes in income tax for 2019-2020

Personal Allowance (the amount you earn before paying tax) will be increased by £649 to £12,500.

The basic rate limit of 20% will apply to earnings from £12,500 to £37,500. The higher rate threshold is also increasing to £50,000 in 2019-2020.

The big change on tax relief for 2019-2020

Landlords used to be able to deduct mortgage interest repayments and allowable expenses from their rental income, but this has been gradually phased out.

By 2020 the new tax rules will be firmly in place. Landlords will be taxed on their total annual income (including income from any other employment) and can only claim tax relief at the basic rate of 20% on whichever figure is lower:

  • Finance costs (inc mortgage interest payments, loan repayments, overdrafts)
  • Profit from rental income (minus allowable expenses)
  • Total income (anything other than savings and dividend income above the personal allowance after deducting losses and tax relief)

So, if you were claiming your interest-only mortgage as an expense, you’re now only able to claim a 20% relief on the lowest of the above bullet points. For most landlords, this will be the finance costs.

Note: For some landlords, adding together their rental income and any other income from other employment will mean they’re pushed into a higher tax bracket, so look out for this.

Conclusion

The new tax regulations make it even more essential that you carefully monitor your costs. You’re perfectly entitled to claim any legitimate expenses, and it’s essential to the proper running of your business that you do so. Unfortunately, as there are often a variety of costs involved spread out over the year, this can be a time-consuming exercise (to put it mildly). Sifting through bank accounts to pick out expenses means things can get missed. This can result in many landlords not actually claiming the tax relief they’re entitled to.

Luckily, there are easier ways to make sure you’re not losing money. Platforms such as Hammock make tracking your expenses easier than ever before. This is how Hammock can help:

  • All tracked payments are categorised and automatically added to your tax statement – no more sifting through pages and pages of bank statements!
  • Track all payments from tenants as soon as they come in – no need to log into your bank account to check.
  • Track all payments from tenants as soon as they come in – no need to log into your bank account to check.
  • Automatic reminders to your tenants if they miss a rental payment – so you’re always on top of what has or hasn’t been paid.

Start your 30-day free trial with Hammock and start saving time on filing your tax return.

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