Staying up to date with the tax rules is essential for any landlord. They usually change at least slightly every year, and you don’t want to be caught out by any rule changes. Failing to pay the right amount of tax or report the right amount of income could spell trouble for you later. If you’re aware of the rules that you need to follow, you can make sure you report everything that you need to and pay all that you need to. Knowing the tax rules can also help you to make the right financial decisions based on timing and other factors.
The following four rules are important for all landlords to pay attention to this year.
1. Goodbye to tax relief on mortgage interest
In 2015, the government announced that they would be phasing out the allowance for landlords to offset their mortgage interest payments against their rental income. They began gradually reducing it, and in the 2017/18 tax year, the tax relief that could be claimed was reduced to 75%. This year, you can claim 25%, but this is the last year that this tax relief will be available. In the 2020/21 tax year, there will be no more tax relief on your mortgage payments.
However, the relief has been replaced by a 20% tax credit. This tax credit isn’t as good a deal for higher-rate and additional-rate taxpayers, but it still offers some help with buy-to-let mortgage interest payments. In the 2019/20 tax year, you can apply the credit to 75% of your mortgage interest.
If you don’t already have a limited company, this is something to consider. Many landlords are setting up limited companies for their new rental properties so that they can pay Corporation tax on their income instead of paying the higher individual income tax rates. Corporation tax is 19% of company profits. This might not make sense for everyone, but you should talk to an accountant about whether it’s a good option for your circumstances.
2. Income tax rate changes
Keeping up with any income tax changes is one of the most important things for landlords to do. The personal allowance has been steadily growing over the last few years due to the current government pledging to raise it £12,500 by 2020. They have managed to do this a year before promised, and you can now earn £12,500 before having to pay income tax. The basic rate of income tax remains at 20%, but the threshold for the higher rate of income has risen this year. Anything you earn over £12,500 is subject to 20% income tax, up to £49,999. What you earn from £50,000 is subject to 40% tax, with the top tax rate of 45% sticking at £150,000.
This will be the same in the 2020/21 tax year. In the following years, the personal allowance and basic rate limit will be indexed with the Consumer Price Index (CPI). The personal allowance is forecast to be £13,310 for the 2023/24 tax year.
3. Capital gains tax allowance increase
If you are selling a second property, such as a rental property or second home, you will need to pay capital gains tax on the money that you make compared to what you bought the property for. This year, the allowance for capital gains tax has been increased from £11,700 to £12,000. You will now get to keep more of your money, although it’s not a lot more. However, it’s also important to remember that the capital gains tax rate on property is higher than for other assets. You will pay 18% if you’re a basic rate taxpayer or 28% if your income goes over the basic rate limit.
There are also some other changes that will be happening next year for landlords that are important to know now. The reason you should pay attention before April 2020 rolls around is that it could cost you money if you decide to sell a property next year instead of this year. Here are just one of the reasons you might want to sell sooner rather than later.
4. Private Residence Relief changes from 2020
From April 2020, the Private Residence Relief rules will change. These rules are currently relevant for landlords who have lived in their property before letting it out to tenants. Currently, you get to claim this relief when you sell. You don’t have to pay capital gains tax on the gains for the time that you live in the property, plus another 18 months after you moved out (previously, it was 36 months). However, the rules will be changing next year so that you can claim only another nine months. For example, if you lived in your property for a year before renting it out, you can claim relief for two and a half years’ worth of gains this year, but next year you would only be able to claim for one year and nine months.
Another change is to lettings relief, which you can claim if you rent out a property that has been your main home. You can claim up to £40,000 (or £80,000 for married couples) of lettings relief, but next year this will only apply to landlords who live with their tenants.
These significant changes in the capital gains tax rules might make you think about whether you want to try and sell your property this year or wait until next year. If you are planning to sell and think that you could secure a sale this year, it might be the better option. If you’re not sure, speaking to a tax specialist might help you to make a decision.
Other buy-to-let changes to take note of this year
Tax rules aren’t the only thing that landlords should be aware of. There are some other changes, both confirmed and still in discussion, that you might want to be aware of. Some of the following things have changed this year or will soon be changing for landlords.
One big thing that landlords will need to consider is the government’s proposal to get rid of Section 21 notices. No more Section 21 notices will mean that landlords will not be able to evict tenants without a reason; in other words, there will be no more “no-fault” evictions. This might change your approach to selection tenants, as well as other things, or you might feel that it won’t make much difference to how you do things. Either way, you need to be aware of the change in the law if and when it comes in.
The ban on letting fees in England began on 1 June 2019. Letting agents and landlords can no longer charge most fees to tenants during the letting process. You can still charge a deposit for the tenancy, a refundable holding deposit, payments associated with the tenant ending the tenancy early, up to £50 for the variation, assignment or novation of the tenancy, and a fee for late payment of rent or replacement of a lost key when it’s stated in the tenancy.
Also earlier this year, a new scheme came into effect on 1 April with the aim of protecting landlord and tenant deposit money. Private-sector agents in England must now be signed up to a government-approved scheme or they could face a fine of up to £30,000. This new law protects landlords and tenants from an uninsured agent going bust or making off with their money and leaving them out of pocket.
The three-storey rule for House in Multiple Occupation (HMO) regulations was removed in October 2018. This rules previously said that HMOs had to have a mandatory licence if the property was occupied by five or more individuals and had at least three storeys. The three storeys element has now been removed, so any HMO that has at least five tenants from two or more unrelated households needs to have a licence. Purpose-built flats with up to two flats in the block are also now required to have a mandatory licence. Any landlords considering buying new properties to run as HMOs should be aware of the rules and ensure they apply for the correct licence.
Keep up to date on the tax rules relating to buy-to-let properties if you’re a landlord, as well as the other laws relating to lettings and property ownership. If you don’t stay abreast of the law, you could end up in trouble for failing to follow the rules.
If you need help with your taxes or financial decisions, you can get help from an accountant, who can offer you advice and guidance. A lawyer can help you if you’re trying to navigate a legal issue, or you can get in touch with your local authority and other official bodies if you have any questions that you’re not certain about. It’s always best to know what you’re doing and to understand your rights and responsibilities.