Q. Over the last few years I have let out a residential property where the rent covers the mortgage payments so I do not receive any income from the property, do I need to report this to HM Revenue & Customs?
A. Despite the fact that you do not receive any income from your rental property, after you have paid your mortgage payments, a tax liability could still arise in relation to this income.
When a mortgage is taken out to cover the purchase of a residential property, the interest element of the mortgage payment is treated partly as an allowable deduction against rental income and partly as a tax reducer when computing an individual’s tax liability, as follows:
- in 2017/18, the deduction from property income was restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
- in 2018/19, 50% finance costs deduction and 50% given as a basic rate tax reduction
- in 2019/20, 25% finance costs deduction and 75% given as a basic rate tax reduction
- from 2020/21 all financing costs incurred by a landlord will be given as a basic rate tax reduction.
The capital element of the mortgage payments is not allowable for tax purposes.
As an alternative to claiming expenses against rental income landlords can claim the property allowance which was introduced from April 2017. This allows an individual to claim a £1,000 deduction from their property income in certain circumstances but if claiming this allowance no relief for expenses is available.
Bearing in mind the above rules and taking into account any other allowable expenditure you may have incurred in relation to the letting, it will be important to identify if a tax liability has arisen. If you find you have a tax liability for previous years and you have not reported this to HM Revenue & Customs within their deadlines you could take advantage of their Let Property Campaign. This gives individuals an opportunity to bring their tax affairs up to date if they are a landlord letting out residential property in the UK or abroad.
To get the best possible terms, you must tell HM Revenue & Customs that you wish to take part in the campaign by making a voluntary disclosure. You will then have 90 days to calculate and pay any tax that you owe.
It is worth noting that HM Revenue & Customs are using information they have about property rental in the UK and abroad to identify people who might not have paid what they owe. If you don’t make a voluntary disclosure now and HM Revenue & Customs contact you at a later date, you could face higher penalties or face criminal prosecution.
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