RLA tax partner RITA4RENT has seen a huge increase in the number of calls on Section 24 – and how the changes to mortgage interest relief are reflected on self-assessment tax returns. Tax expert Michael Wright explains.
Another tax year end passes, where has the year gone?
Now April 5th has passed, landlords are now able to start work on their 2017/18 tax returns.
These can be completed any time now, right up until the online filing deadline of 31stJanuary 2019.
At RITA4RENT we have been receiving increasing numbers of calls on how the Section 24 changes will affect your tax returns in the 2017/18 tax year.
Before we get into the detail, let’s first take a look at the important dates to bear in mind over the coming year when it comes to completing your tax returns.
Important dates for your diary
31 Jul 2018
For those who are liable to “payments on account,” this is when the second payment is due towards the 2017/18 tax year.
31 Jul 2018
Deadline to renew tax credits if applicable to you.
5 Oct 2018
If this is your first year as a landlord, this is the latest date you should register for self-assessment if you need to prepare a tax return for the 2017/18 tax year.
31 Oct 2018
Deadline to file your 2017/18 self-assessment tax return if you opt for paper filing.
30 Dec 2018
Deadline to file your 2017/18 tax return online if you wish to add your self-assessment tax liability to a future tax code, assuming you meet the criteria.
31 Jan 2019
Online filing deadline for your 2017/18 self-assessment tax return.
31 Jan 2019
Deadline for paying your 2017/18 self-assessment tax liability.
31 Jan 2019
Deadline for paying your first “payment on account” towards the 2018/19 tax year if applicable.
28 Feb 2019
If you do not pay your tax by 31st January 2019, this is the deadline to avoid paying a penalty of 5% of the tax owed.
On April 6th 2017 Section 24’s four year equal phase-in began.
When the rules are fully in force in 2020, mortgage interest will no longer be deductible when calculating your rental profits.
The Section 24 rules apply to those letting residential property, and so you will not be affected if you operate a Furnished Holiday Let, or a commercial lettings business.
The reason these types of properties are not caught by the Section 24 rules is because this activity is classed as a “trade,” whereas the Government are attacking the so called property “investment” target.
As an aside, the changes will not affect those with property in a limited company, but will affect Limited Liability Partnerships as well as unincorporated partnerships.
As a very brief illustration of how the position will be in 2020, we shall use a landlord named Mr Jones as an example.
He has rental income of £80,000, repairs, insurance and management costs of £20,000 and mortgage interest of £50,000.
Under the old rules his profit would be £10,000 but once the new rules are fully phased in, his profit will be £60,000. Under the new rules, the above profit will be taxed at his income tax rates.
From there, a “reducer” is applied to the tax owed as calculated above, which is typically 20% multiplied by the mortgage interest paid.
To confirm, we use the word “typically” above, as strictly, the tax “reducer” is calculated as the 20% of the lower of:
- Total mortgage interest and finance costs which have not been deducted from income
- Total profits less any losses brought forward
- Total income (minus savings/dividend income) which exceeds the personal allowance
However, the above is the position in 2020, whereas at present, tax returns need to be completed for the first year of the phase-in i.e the 2017/18 tax year. Year by year of the phase in, the amount of mortgage interest which may be claimed on your self-assessment tax return is:
- 75% for the 2017/18 Tax Year
- 50% for the 2018/19 Tax Year
- 25% for the 2019/20 Tax Year
- 0% from 2020/21 Tax Year onwards
Therefore, we can now begin to explore the 2017/18 position in greater depth, and we shall use Mrs Jane Smith to illustrate how her tax return will look in this first year of the phase in.
Jane is a higher rate taxpayer. In the 2017/18 tax year, she received a gross salary of £50,000, and was on a standard tax code. The only other source of income is Jane’s rental property which has no losses brought forward, and is owned solely.
In the 2017/18 tax year, her activity was as follows:
- Rental income received of £20,000
- Mortgage interest incurred of £7,000
- Other costs of £4,000 which consist of:
Insurance and utility costs of £750
Repair costs of £2,000
Letting agent fees of £1,000
Other expenses of £250
Under the old rules, which were in place in the 2016/17 tax year, this would have given a taxable property profit of £9,000 (i.e £20,000 – £7,000 – £4,000)
However, in the 2017/18 tax year, we will be reporting a taxable profit of £10,750. This is because under the Section 24 rules, and this being the first year of the 4-year equal phase-in, only 75% of the mortgage interest can form part of the property profit. Therefore, we calculate the taxable profit as being:
Rental Income £20,000 LESS:
Mortgage Interest of £7,000 x 75% £5,250 LESS:
Other Expenses £4,000 EQUALS
This profit is then taxed, but the tax owing can be offset by an amount equating to the remaining 25% of the mortgage interest (£1,750), multiplied by 20%. Please note, the £1,750 is calculated by taking the £5,250 in the previous paragraph, from the £7,000 overall mortgage interest charge.
For Jane, let’s assume that her salary and rental profit is exactly the same as the previous year, and we can therefore show the effect on tax compared to last year:
|2016/17 Tax Year||2017/18 Tax Year|
|Tax Charged at 40%||£3,600 (£9,000 x 40%)||£ 4,300 (£10,700 x 40%)|
|Less “reducer” £1,750 x 20%||N/A||(£ 350)|
|Total Tax Owed||£3,600||£ 3,950|
Therefore, Jane has an extra £350 to pay this year compared to last year, even though her income figures have remained the same. In addition to the above, it is worth pointing out that Jane will be liable to payments on account towards the 2018/19 tax year, given her salary position and that her liability exceeds £1,000.
This 2017/18 tax year is just the first year of the four year phase-in. When the rules are fully in place in 2020 however, at the point when no mortgage interest can form part of the property profit, a comparison to last year would look like this (again with income figures remaining the same):
|2016/17 Tax Year||Once Rules Are Fully Phased In|
|Taxable Profit||£9,000 (£20,000-£7,000-£4,000)||£16,000 (£20,000 – £4,000)|
|Tax Charged at 40%||£3,600 (£9,000 x 40%)||£ 6,400 (£16,000 x 40%)|
|Less “reducer” £7,000 x 20%||N/A||(£ 1,400)|
|Total Tax Owed||£3,600||£ 5,000|
Therefore, when the rules are fully in place in 2020, the tax owed will be £1,400 greater, even though Jane’s income figures remained the same.
We do hope this feature has helped to explain the 2017/18 changes as simply as possible.
For any of your property tax needs, please do not hesitate to contact RITA4Rent on Freephone 0800 1 22 33 57 or via email – firstname.lastname@example.org