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Hints & Tips

Lymm Village

Tax Hints and Tips

Lymm Village

Free hints and tips about tax and accountancy from Lymm Tax

Are you are landlord or thinking about becoming one?

The government is changing the way in which landlords calculate their taxable profits and surprise, surprise, you are likely to pay more tax as a result.

The changes I am talking about affect those who let residential property and have outstanding mortgages.

Currently the accounts for property businesses follow normal accounting principles. This means most costs incurred wholly and exclusively in connection with the property, provided they are not “capital” in nature, can be deducted from the rents received in computing the profit on which the landlord pays tax. Such costs, of course, include mortgage interest and the associated costs of raising the mortgage such as application, valuation and broker’s fees.

This will change over the next few years. The changes will be introduced gradually starting in April 2017. By April 2020 the phasing in will be complete and landlords will no longer be able to deduct interest costs or the mortgage set up costs from profits. A limited form of relief will be available whereby landlords can deduct 20% of the cost from their tax bill for the year.

Landlords who expect to make a profit every year and who only pay tax at 20% anyway should not be adversely affected by the changes as they will give the same result as the current rules. However:

  • Higher rate taxpayers will lose out as the tax relief will only be at 20% instead of their upper rate of 40% or 45%.
  • Those who are basic rate taxpayers but near the top of the rate band could find themselves going up into the 40% band because their assessable property profit will be more due to interest not being deducted in computing the profit (similarly at other thresholds).
  • A landlord whose total income is currently a little under £50,000 could lose child benefit under the new rules as their taxable income will increase so may go over the £50,000 threshold.