Mortgage interest tax relief is set to be gradually cut back over the next few years, so by 2020/21 the maximum tax relief a landlord will receive is 20%. Landlords have to pay income tax on their rent regardless of their employment status. They will need to complete a tax return annually, declaring the income they have received over the year. As of 1 April 2017, the following will not be classed as an allowable expense for landlords:
- Any costs associated with buying or selling their rental property
- The “value” of their own time (i.e. if a landlord does his/her own repairs- he/she can’t claim a fee per hour)
- Any capital repayments on their mortgage
- Any improvements to the property (although improvement costs can be offset against capital gains tax when the landlord sells, so they should keep any receipts for these)
- Mortgage interest; until 1 April 2017 a landlord has been able to claim the full amount of interest they pay on their mortgage, however this is changing over the next few years.
It’s good to get inside the mind of a typical landlord. Many of our clients will be looking at the tax return they have just put in and realise that their returns will take a hit because relief on mortgage interest will now start reducing.
We like to tackle these changes with our landlords; it would be false economy for a landlord to think that cutting out the agent will save money. Letting and management fees are tax deductible and, importantly, we will find better tenants and keep the property full (arrears and voids are potentially a much bigger issue than tax or anything else). The National Landlords Association found that 37% of Landlords had arrears in the past year - ours is a fraction of 1%.
We are property experts and want to give our landlords a five star service, so Dexters' staff keep on top of such legislative changes so we are well informed. However, we are not tax experts and so if a landlord needs some guidance on these changes, we suggest they seek professional advice from an accountant or tax advisor.
Changes take effect on 1 April 2017.
Alan Ward, chairman of the Residential Landlords Association, says: Landlords will be battered by one of the most hostile tax regimes in the western world come April – but the Treasury is being warned that rather than just penalising landlords, it is tenants who will be the real losers. There is a move to tax landlords not on the profit they make, but on all their income. The phasing restriction of mortgage interest relief to the basic rate of income tax along with other recent measures will make renting a much less attractive investment option for many. At a time when increasing numbers of people rely on the rented sector, which will account for 25 per cent of all housing by 2025 according to forecasts, this will only reduce the growth in supply, driving up the cost of rents.