The changes to how much tax landlords have to pay will come into full effect in April 2020 and have been phased in slowly since 2017.
It is important that property owners are aware of the changes in order to avoid unwanted fees and fine from HMRC. For those with tax protection insurance, the cost for HMRC audits may be covered.
Here is what you need to know as a landlord in order to be prepared and protected against the changes.
Each year that the changes are phased in, the amount of mortgage interest payments deductible from your rental income will decrease by 25%. By 2020 you won’t be able to take any of your mortgage interest payment from your rental income but you will be given a 20% tax credit.
Before April 2017 landlords could deduct all mortgage interest payments from taxable income. Basic taxpayers will be unaffected, for landlords in a higher tax bracket they will have to pay more.
Capital gains tax
Capital Gains Tax (CGT) is a tax paid on the gains you make, rather than the amount you would get if you sold your property.
As of the beginning of 2019, in most cases where the property has been let, you will have to pay CGT when you come to sell.
However, this comes with exceptions. If you have ever lived in the property the amount of CGT you pay will be reduced. This is because you only pay tax on the time the property wasn’t your main residence.
You pay no tax on rental properties that are sold within three years of purchase. Currently the period of exemption in regards to tax relief is 18 months, however, from April 2020, this will be reduced to nine months.
In the 2018 budget, it was revealed that from 2020 the letting relief would be changed so that it is only available to ‘those who are in shared occupancy with a tenant. This change will not affect owner-occupiers or landlords who have never lived in the property they are renting out.’
Currently, lettings relief provides up to £40,000 of relief (£80,000 for a couple) to people who let out a property that has at one point been their main home.