Changes are coming to self-assessment tax - are you ready?
In 2022, a few tax rules have changed that could affect landlords. Let’s take a look at the key changes - do they impact you?
- Mortgage interest repayments
This has been phased out over the last few years, with 2020-21 the first year where it is reduced to zero. Landlords can now only offset 20% of mortgage interest payments against tax.
- Capital Gains Tax
Capital gains allowance increased slightly from £12,000 to £12,300 in 2020-2021. If you sold a rental property last year, this could impact you.
- Private Residence Relief
If a landlord lives in a property then lets it to tenants, under the old rules the landlord would pay no capital gains tax for the period they lived in the property plus the following 18 months. This has now been reduced to nine months.
- Changes to accounting date
It is not yet confirmed, but HMRC has been consulting on making changes to accounting periods for businesses operating as sole traders or partnerships from 2023-24. Businesses could still select their own accounting dates, but income tax would be charged according to the tax year.
How will the changes affect landlords?
The overall picture is that landlords face higher tax bills: since changes announced in April 2017, there has been a gradual shift towards increasing the level of rental income that is taxable by reducing deductible costs, such as mortgage interest. The capital gains tax allowance has increased slightly, but this doesn’t counteract the changes to mortgage interest tax relief.
Changes to the rules on Private Residence Relief also tighten things up for landlords as the effect will be to make more capital gains tax payable.
Top tips for managing your tax assessments
As a landlord, you need to do all you can to maximise profitability. These top tips might help you find ways to help manage your portfolio:
- Offset COVID-related losses
The pandemic hit many landlord’s incomes, with tenants in arrears or requesting payment holidays. If you made a loss in the last tax year, you can carry it forward to offset against your next tax bill. This only works if your overall portfolio has made a loss. You may also be able to claim for costs such as council tax and heating if your property was unoccupied during the last year.
- Claim all you can
Allowable expenses can be used to offset against your tax bill, saving you money. The rules of these expenses change regularly, but staying on top of how you can offset costs such as property repair and maintenance, insurance, replacement items and professional fees will help cut down bills. Ask an accountant to help if you don’t have time to check the rules yourself.
- Know your deadlines
When you’re a busy landlord, it’s so easy to miss key dates - and face a fine as a consequence. Good organisation will help. For example, you need to register with HMRC by 5th October each year to get a government login for self-assessment. Online submissions need to be entered by 31st January. If you miss submission dates, you’ll pay £100 then £10 for each additional day for the first three months - the penalties get steeper if you let it go longer than this.
- Keep track of your expenses
Self-assessment is much easier if you know what information you will have to submit and get organised about retaining it. For example, you will need a record of when tenancies began or ended, money spent on the property and rental income received. Supporting documents such as invoices, receipts, rent books and bank statements can help to evidence your submissions.
- Get more time to pay
If your cash flow is a problem, don’t bury your head in the sand. Bills up to £30,000 can be paid using the HMRC Time to Pay Service, which lets you settle the bill over the course of a year - although interest is payable on the debt so you will end up paying more.
- Consider whether a holiday rental might be more profitable
If your portfolio is underperforming, it might be worth exploring whether operating as a holiday let rather than a rental property would be more beneficial. Holiday lets are viewed as a business by the tax authorities (although this might not be the case if you have a substantial portfolio), so you can still offset mortgage interest against taxes, whereas rental properties can only be offset against 20% of mortgage interest. You also pay less capital gains tax on a holiday let when you come to sell - 10% compared to 28% for a typical rental property.
- Sometimes it pays to hire a professional
A specialist in property finances can often more than pay for themselves in finding ways to reduce your tax bill as well as saving you time and effort. Using a professional also makes it much easier to manage and submit your tax return information because you are not dealing with all that paperwork yourself.
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