The new tax rules for landlords have been in since April 17 but it’s only now that you will be completing your first tax return under these rules, so here is a little reminder of how the new rules work (and a little work out for your brain in this hot weather!)

In the good old days pre April 17, unincorporated landlords would only pay tax on their rental profit.  The interest that you pay on your “interest-only buy to let mortgage” was a cost that you could claim in full in working out your profit for the year.  In tax terms, you would be saving tax at your highest marginal tax rate on this mortgage interest, so at 40% for a higher rate taxpayer.

From April 2020, you will no longer be able to deduct your mortgage cost from your rental income in working out the profit.  Instead, you will receive a 20% tax credit for your mortgage interest.

This new system will potentially increase the tax you pay in 2 ways:

1. If you are a higher rate taxpayer, the tax credit is only 20%, whereas before you had 40% relief
2. Less obviously, you could be forced into a higher tax bracket, depending on your other income, as the rental income that you now need to declare is higher than it was before. This could have knock on effects for child benefit or tax credits, or even capital gains tax if you are selling your rental property.

The change is being phased in over 3 years – which leads to some complicated calculations over the next few years.

In 17/18, you can still claim 75% of your mortgage interest relief, and you’ll get the 20% tax credit on the other 25%

In 18/19, you can claim 50% of your mortgage interest relief, and you’ll get the 20% tax credit on the other 50%

In 19/20, you can only claim 25% of your mortgage interest relief, and you’ll get the 20% tax credit on the other 75%

So if you are doing your 17/18 tax return, you need to provide HMRC with this information.

There are new boxes on the 2017/18 tax return to complete – the 75% you can claim this year goes into Box 26 on the Property pages, and the 25% you can’t claim needs to be entered into Box 44.  You’d then be wise to check the tax due as a result, to make sure it has been calculated correctly.

Good luck!

As ever, if you need some help with this, or your tax return this year, then please drop me an email at rosieforsyth@wilkinsco.co.uk

Statements are arriving in the post and payments on account of 18/19 tax are due at 31 July.  What are they and how are they calculated?

If you pay your tax under self-assessment – you will probably have to make “payments on account” of your tax bill at 2 stages during the year -31 Jan and 31 July.  They are just that – a “part payment” of your anticipated tax bill for the year and are calculated based on your tax bill for last year.

An example is the easiest way to explain the calculation:

You started your business in May 2016, prepared your accounts and calculated your tax bill for 16/17 to be £3,000. This was due for payment at 31 Jan 2018.  But you also had to pay a payment on account of your next year’s (17/18) tax bill – and this was automatically calculated at 50% of the previous year – so £1,500.  So actually at 31 Jan 18 you had to pay £4500.  You may have just paid this at the time, thought it was a lot, but not really grasped what it was for.

The second payment on account for 17/18 is due by the end of July and again is 50% of last year’s bill – so another £,1500.

So by now – you have paid £3,000 on account of your 17/18 tax bill – even though, if you have not yet filed your tax return, you don’t actually know how much your final bill will be.

If your profits in Year 2 have gone up – and when you do your accounts and file your tax return, your tax bill for 17/18 is worked out to be £5,000, then you have already paid £3,000 of it during the year – so you only owe a further £2,000 at 31 January 2019.  But, the process is repeated – so at 31 January 19 you will owe £2,000 for this year – and your first payment on account of 18/19, calculated as before at 50% of the current year bill (£2,500) – so £4,500 in total.  You then owe at 31 July 2019 your second payment on account of 17/18 – another £2,500.

This is all fine if your profits have gone up.  If you are in the scenario where profits are lower than the year before, then you will have overpaid in the year with your 2 payments on account and you will be due a refund for that year.

In the example above, if your tax bill for 17/18 worked out to be £2,400, then because you have paid £3,000 during the year, then you have overpaid £600.  But, taking into account your first payment on account for 18/19 which will be 50% of £2400 = £1200, you still owe £1200 – £600 = £600 at 31 Jan 19!

Confused??  Who said tax wasn’t taxing!

If you know your profits are going to be lower in the next year, perhaps because you are doing less hours or lost a key client, then you can apply to reduce the payments on account that are going to make – to avoid overpaying in the first place.  Cashflow is crucial to a small business, so you don’t want to give the taxman anything that is not really his!

Getting on with your tax return for the year now will also give you certainty about your tax bill and how much you should be paying.  Why wait til January if you think you have overpaid and may be due a refund?

For more information or help with your tax return for the year, please contact Rosie Forsyth.