Rental income tax 2017-18

I am a director shareholder of a limited company extracting salary and dividends to a total of £50,000 per year and also have (from the start of the 2017/18 tax year) acquired a rental property – I receive £1,500 rent per month from my tenants and have an interest only mortgage of £500 per month and fees paid to the property agents of £120 per month.

I am unsure what I need to report on my tax return – can you let me know what expenses can be offset against the rental income and how much tax I will pay?

 

Tax on rental income 2017-18

 

Answer, February 2018

Once you start earning income from rental properties you require supplementary land and property pages to disclose this information on your tax return.

Rental profits will be taxed at the normal UK income tax rates.

On the land and property pages firstly, the rental income is disclosed. This is total rents that were applicable to you personally in the tax year – before any agents’ fees etc. were deducted.

For example, if you own the property in a 50:50 split this will be your share only.

You then enter any allowable expenses for your rental properties….

 

Rental property expenses

Allowable expenses are things you need to spend money on in the day-to-day running of the property such as:

  • letting agents’ fees
  • buildings and contents insurance
  • interest on property loans (i.e. mortgage interest but not capital repayments), there can be some restrictions on the amount of finance costs allowable for tax purposes which we will discuss shortly.
  • maintenance and repairs to the property (but not improvements)
  • services you pay for, like cleaning or gardening
  • other direct costs of letting the property, like phone calls, stationery & advertising and travel to the property

 

This expenditure is disclosed on the tax return having been allocated into the following categories:

  • Rent, rates, insurance and ground rents
  • Property repairs, maintenance and renewals
  • Loan interest and other financial costs
  • Legal, management and other professional fees
  • Costs of services provided including wages

 

Expenditure that is of a capital nature, such as renovation work beyond normal wear and tear costs is not included. These costs, in some cases, are included in any capital gains tax calculations when you come to sell the property.

Please note that the wear and tear allowance of 10% that used to be able to be claimed against rental income where a furnished property was let, ceased to be available from 6th April 2016.

 

Tax relief on mortgage interest

As mentioned, there are new restrictions to the amount of mortgage interest and general finance costs relief available for landlords who are higher rate taxpayers. These new rules apply to individuals but not to companies.

This change came into effect for the 2017/18 tax year (from 6th April 2017) and is being phased in over 4 years with only 75% of the finance costs available for higher rate relief in 2017/18 phased down to 0% by the 2020/21 tax year – by which time any mortgage interest paid will only attract basic rate relief.

So by 2020/21 you will only be entitled to basic rate tax relief on mortgage interest even if you are a higher rate tax payer.

In your example, total rental profits are as follows:

 

rental profits

 

However, given you are a higher rate taxpayer, for 2017-18 only 75% of the mortgage interest is allowable for higher rate relief, as such the mortgage interest for the purposes of the initial calculation is restricted to £4,500 and rental profits are therefore restated to £12,060 and it is this figure that will be disclosed as rental profits on your tax return.

However, the £1,500 of mortgage interest that has not been included in the calculation to this point is still entitled to basic rate tax relief and should be entered in this new section on your tax return for 2017-18. £1,500 x basic rate tax of 20% = £300 tax relief.

 

Tax calculation 2017-18

See below for summary of the tax calculation for the example in this article.

Salary and dividends, which we are told total £50,000, we are assuming are split in the most tax efficient manner per our article here – this article also explains how dividends are taxed.

We are assuming the tax payer is a UK non-Scottish resident.

 

Tax calculation 2017-18

 

 

Tax on rental income

There are numerous complexities to the above that have not been touched on in this article, especially where your income is near the threshold between the basic and higher rate bands. If you are in any doubt as to your circumstances you would be wise to seek the advice of an experienced and qualified accountant.