How to fix mistakes landlords make when filing a self assessment tax return

Every year is the same. Come tax season, landlords all over the UK find themselves confused when filing a self assessment tax return with HMRC. The rules tend to change quite a bit every fiscal year, making it easy to make mistakes and get lost in the process. For new landlords, the first time can be even more daunting.

The first thing to get out of the way is: even if you don’t consider yourself self-employed or a small business owner, if you are a landlord earning more than £2,500 from renting out a property there’s no way around it - you have to fill in a self assessment tax return.

Landlords are liable for a number of taxes, the most important being the rental income tax, National Insurance contributions, and capital gains tax.

One of the most common mistakes people in this position make is to believe they can claim the full amount of the mortgage repayments. This is not true. Landlords can only claim a percentage of the interest element.

Some people are aware that the percentage of the interest they can claim has been gradually reduced over the last year following some changes implemented by HMRC, but after having a chat with some of our users, we found out most of them don’t know anything about it. The best way to avoid such mistakes is to keep yourself informed about changes in regulation and what is expected from you.

To explain briefly, before 2017, the interest for a landlords’ mortgage was 100% deductible. Since most landlords have interest-only mortgages (where you pay only the interest each month and the price of the property at the end of the period), they could basically claim all mortgage repayments. However, the mortgage interest tax relief changed and after 2017 landlords received a new tax credit, somewhat less generous, that’s being rolled out gradually. Depending on total income and investments in the property rented out landlords can be obliged to pay more tax or benefit from carrying forward unused finance costs.

The tax relief that landlords of residential properties get for finance costs is being restricted to the basic rate of Income Tax and a lot of landlords we’ve been in touch with also seem to not be aware of the changes that will be fully in place from 6 April 2020.

A common misconception is that many landlords think that when they purchase a buy-to-let flat all expenses related to the purchase can be claimed back as expenses. But that’s not really the case. The vast majority of expenses can be claimed as long as they relate directly to renting or maintaining the property, such as letting agents’ fees, accountants’ fees, legal fees, service charges etc. So everything that doesn’t increase the value of the property is OK to be claimed.

For example, they can claim costs related to repairing the property. However, if the expenses are related to improving it, like fitting a new kitchen or even buying a new state of the art washing machine instead of a like-for-like washer, then these cannot be claimed against rental income - they can instead be claimed against capital gains when the property is sold.

Another factor that tends to generate a lot of confusion among landlords is if they live in the property they are renting out. If this is the case, then they can be eligible for the Rent-a-Room Scheme, probably the best tax-free allowance for landlords as it gives them zero tax on the first £7,500 they make from rent - if the landlord earns under this they don’t even need to submit a self assessment return. This is also applicable for landlords who have rooms listed on short-term rental platforms like AirBnb.

It’s important that landlords know their rights and have all the information ready in order not to miss the 31 January deadline for online tax returns every year.

Once they’ve filed their tax return, they then need to pay the tax owed by the same date. To help landlords figure out how much tax they need to pay we have two free tools they can use to calculate their property taxes - a capital gains tax calculator to see how much tax they must pay when they sell their property, and a rental income tax calculator if they are renting out.

Tram Abramov is the CEO and co-founder of TaxScouts.

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