Working out the various tax implications involved in being a buy-to-let landlord or property investor can be a minefield, particularly as regulations continue to change.
The majority of landlords who earn money through renting out a property will need to pay income tax on the profits, which involves registering for self-assessment through the government’s website by 5 October following the tax year of your first rental income.
The amount of tax owed is worked out based on how much profit you make, as well as your personal circumstances, and an updated version of this information has just been released on HMRC’s website to improve clarity surrounding the hurdles faced by landlords and investors.
Since April 2017, the government has been gradually phasing in new restrictions on how much tax relief landlords can claim from their mortgage and loan repayments and overdrafts related to the property – which will reduce from 100% down to 0% by 2021. Alternative finance returns, fees and other incidental costs involved in obtaining financing, and discounts, premiums and disguised interests are also affected by the changes.
How the tax relief will be phased out
| Tax year | Percentage of finance costs deductible from rental income |
Percentage of basic rate tax reduction |
|---|---|---|
| 2017-2018 | 75% | 25% |
| 2018-2019 | 50% | 50% |
| 2019-2020 | 25% | 75% |
| 2020-2021 | 0% | 100% |
The information included on the government’s website also covers how to work out your rental income, what expenses can be claimed and mileage rate deductions.
A new self-assessment help sheet for the government’s Rent a Room scheme has also been published, detailing how occupiers and tenants can make a tax-free income by providing furnished accommodation in their only or main home.
To read more about how the changes are expected to affect the buy-to-let market, click here.
