The past few years have seen the rise in what is known as the accidental landlord.
These are people that have ended up renting their property as a result of circumstance rather than design. They may have had to relocate or split up with their partner or inherited but, having been unable to sell the property, have ended up as landlords.
An estimated 80,000 properties were added to the UK’s rental market in 2017 according to property services company Countrywide and this growth in accidental landlords is set to grown in an uncertain market.
And accidental landlords can often lead to accidental tax bills as, in their very nature, accidental landlords tend to be amateurs and newcomers to the lettings market.
The first thing to be aware of is that landlords must pay tax on their entire rental income with tax relief only available at 20% regardless of which tax band the landlord maybe in. In other words, a landlord on higher tax will pay tax at 40% or 45% of his rental income but only be able to claim 20% back as tax relief.
Secondly, the government is phasing out tax relief on offsetting mortgage interest payments against rental income and this is due to be replaced by a 20% tax credit.
This year landlords will be only allowed to offset 50%, falling to 25% in 2019 and zero in 2020. For example, a higher-rate payer with £10,000 income a year, and mortgage interest payments of £9,000, currently has a tax bill of £400. By 2020, that bill will rise to £2,200.
Any property that has been rented will also be liable to capital gains tax (CGT). The tax-free allowance its currently £11,300 with 28% CGT rate for higher rate taxpayers. Lower rated taxpayers get an 18% CGT rising to 28% over the basic tax rate band.
In addition, from 2019, landlords will also be required to pay capital gains within 30 days of selling a property rather than at the end of the tax year as is now the case.
One other tax change to note for landlord submissions in 2018 and beyond is the replacement of the old 10% wear and tear allowance. This 10% of net rent deductions could be applied whether landlords replaced any furnishings, fixtures or fittings or not but as of April 2016, landlords are only able to claim tax relief for replacement costs only on furniture, furnishings or kitchenware for their rental property. Unlike the previous wear and tear that can be claimed by both furnished and unfurnished landlords.
One final issue is actually one of paperwork. The Government's Making Tax Digital for Business (MTDfB) plans will require all businesses and landlords to file quarterly digital returns. This was originally intended for implementation from April 2018, but has been pushed back to April 2019 for VAT returns and to April 2020 at the earliest for income tax and corporation tax for both businesses and sole traders, including landlords. You can read more about MTD on the ICAEW website.
David is an authorised High Court Enforcement Officer and our Director of Corporate Governance