Residential lets

15 March 2018

If you are renting out a property, you may find the way it is taxed and the reliefs available against your Income Tax liability may not be what you expect. Joint rental income Property can be owned in unequal shares as tenants-in-common and rental income is normally split according to the ownership of a property. However, for married couples or civil partners who jointly own a property, the income is split 50:50 by default, regardless of ownership. So if the husband had a 99% interest in a property and the wife 1%, the rental income would still be taxed 50% to husband and 50% to wife.

It is, however, possible to make a joint election for the income to be split to reflect the beneficial ownership. This can be done via HMRC Form 17.  This must be notified to HMRC within 60 days of the date you wish the election to take place and submitted with a certificated declaration of trust to prove the ownership split.

Please note these rules do not apply to rental properties held in a partnership or furnished holiday lets.

Restricted finance costs Previously, landlords have been able to deduct 100% of finance costs (e.g. mortgage interest, fees, commission) against their rental income, reducing their income tax liability.

From 5 April 2017, 25% of the finance costs no longer counts as a deductible expense and from 5 April 2018 this will increase to 50%.

The percentage of finance costs not deductible from income are being phased as follows:

2017-18 2018-19 2019-20 2020-21
25% 50% 75% 100%

 

On the amount not deducted in the year, landlords will only be able to claim a basic rate tax reduction for that portion of finance costs. This tax reduction will be calculated as 20% of the lower of:

  1. Finance costs not deducted from income in the tax year
  2. Profits of the property business in the tax year
  3. Total income of the individual (excluding savings income & dividend income) that exceeds the personal allowance in the tax year.

Therefore in 2017-18, 75% will be fully deductible from income to arrive at rental profits and a tax reduction will need to be calculated above for the remaining 25% not deductible from income. By 2020-21 no finance costs will be deductible and the tax reduction will need to be calculated.

Any excess finance costs may be carried forward to future years if the reduction has been limited to 20% of the profits of the property business.

The impact of the restriction to finance costs is complex and depends on your individual circumstances. If you would like more information on either of the above or believe you may benefit from altering your split of rental income, please contact us today.