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Are You Prepared for the Tax Changes?

Landlords could be in for a rude awakening next week when they come to file their 2017/18 taxes, as research conducted by BDRC Continental on behalf of Kent Reliance found 15 % don’t fully understand the implications of the new tax changes.

Who Will They Affect?

The changes affect landlords with mortgages on rental property. Previously, the interest element of monthly repayments could be off-set against tax, meaning landlords wouldn’t pay tax on the interest. Now, the amount of tax relief on that interest has been reduced.

Due to this reduction, more of a landlord’s income will be taxable, which could push them into a higher tax band, which in turn could mean they have to pay more tax overall.

Don’t Put It Off

Any rent received between 6th April 2018 – 5th April 2019 must be declared by law to HMRC, but the tax doesn’t have to be paid until the following January (2019).
 
Leaving it until January to work out tax liability and pay what is due is not advisable as by then, more changes will have come into effect.

Hannah McCartan, MD of McCartan Lettings, comments “The problem with tax is that it is always based on historic figures, so it can be difficult to plan ahead – however, a forward-thinking accountant will be able to give you options how to plan for your future bills, and help you to make sense of how upcoming regulations could affect you.

In a bid to help all of the landlords on our management service, McCartan Lettings will be sending out a free consolidated Statement of Account to all of our managed Landlords for the last tax year, to help our landlords submit their accounts early.”

Seeking Professional Advice

Below is an example of how the change would affect a landlord with a £40,000 per annum employment and a rental portfolio which is highly geared:
 
 
Before Changes
(2016/2017)
After Changes
(2020/2021)
Employment Income  40,000  40,000
Gross Rents Received 100,00  100,00
Other Rental Costs  20,000  20,000
Loan Interest 70,000  70,000
Taxable Rental Profit 10,000  70,000
Gross Taxable Income  50,000  120,000
Personal Allowance  11,000  nil
Tax Due, Basic Rate @ 20%  6,400  6,400
Tax Due, Higher Rate @ 40%  2,800  35,200
Total  9,200  41,600
Less Interest Relief @ 20%  nil  14,000
Next Tax Liability  9,200  27,600

The underlying rental profit is unchanged at £10,000, but the tax payable increases by £18,400. £4,400 of this increase is due to loss of the tax free Personal Allowance.

The new legislation will result in more landlords being pushed into higher rates of tax due to the way the relief on mortgage interest will now be calculated under the new legislation. For example, the taxable income is now £120,000 rather than £50,000. This measure also affects those residential landlords who are more highly geared i.e. with a medium to high percentage of mortgages/loans.

If you are looking for a letting agent who understands all aspects of buy-to-let investments and who can put you in contact with recommended professionals such as specialist tax advisors, contact McCartan on 01792 430100, or click here to email us.

Disclaimer: the information presented in this article is with information title only. Each landlord’s situation is unique, and you should seek professional tax advice before implementing any measures. The information in this article is not intended to be a source of tax advice.
 
This article has been updated from 2018.

Source: Landlord Knowledge
 
Related: How Can Landlords Stay Profitable in 2019? / Planning for 2019

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