If you are a higher-rate taxpayer you can no longer offset all your mortgage interest against rental income before calculating the tax due. This will lead to higher tax bills even if you have not seen your income increase.

The reduction in relief is being phased in between now and 2020 and will be replaced by a 20% tax credit. At the moment, landlords can offset only 75% of their mortgage interest against their profits. This falls to 50% next year, 25% in 2019 and zero in 2020.

While the move mainly affects those who already pay higher-rate income tax, it will push some basic-rate taxpayers into the higher-rate bracket once their rental income has been taken into account. Others will lose means-tested benefits.

The change applies only to private individual landlords and not to those who own property through companies.

For all landlords, the income you receive as rent is taxable. You need to declare any rent you receive as part of your Self Assessment tax return. The tax on your income is then charged in accordance with your income tax banding (20% for basic rate taxpayers, 40% for higher rate, and 45% for additional rate).

However, you can minimise the tax you have to pay by deducting certain ‘allowable expenses’ from your taxable rental income.

Allowable expenses include:

• Interest on buy to let mortgages and other finance charges (but see below).
• Council tax, insurance, ground rents, etc.
• Property repairs and maintenance – however large improvements such as extensions, etc., will not be income tax deductible. They will be added to the cost of the property when it is sold and be deductible against any capital gain.
• Legal, management and other professional fees such as letting agency fees.
• Other property expenses including buildings insurance premiums.

Prior to April 2017, tax was payable on your net rental income after deducting allowable expenses including mortgage interest. This meant that landlords paying higher (40%) or additional (45%) rate tax could claim tax relief at their highest rate.

However, from April 2020 tax relief can only be reclaimed at the basic rate (20%), whatever rate of tax the landlord pays. The rules are being phased in over 4 years commencing April 2017.

This can be yet another confusing area of tax and you must be careful not to miscalculate your expenses or the tax you need to pay. Call Vincent & Co on 01803 500 500 to discuss your individual position and we’ll help you to be compliant.