Introduction
In this guide, we delve into essential topics for landlords and property owners, including tax relief on mortgage interest for let properties, profit extraction strategies, and addressing National Insurance Contribution (NIC) gaps.
As regulations and allowances continue to change, it’s crucial to stay informed and make well-informed decisions to maximise your tax benefits and secure your financial future
Tax Relief for Mortgage Interest on Let Properties
Understanding Tax Relief for Landlords
Individual landlords cannot deduct finance costs, including interest, from residential property rents for tax purposes. Instead, a basic rate tax credit is calculated as 20% of the lower of specific amounts. In situations where property income is low or a loss, little to no tax credit can be set off. However, excess interest not relieved can be carried forward to the next tax year.
Example Scenario
Consider a landlord with trading profits and rental income. In the first year, they experience a property loss and zero property profits. In the second year, they improved rental income and trading profits. The tax credit is calculated as 20% of the lower amounts, providing relief for unused interest paid in the first year. Unrelieved finance costs can be carried forward indefinitely.
HMRC Targets Airbnb Landlords
Online Platforms and HMRC
Online platforms like Airbnb must now provide HMRC with data on payments made to individuals letting rooms on a short-term basis. HMRC matches this data to tax returns and contacts taxpayers who may not have declared their rental income correctly.
Understanding Rental Income Tax Requirements
For those letting a room or two in their own home, rental income may be covered by rent-a-room relief. For separate properties used for holiday lets, a property income allowance can cover income up to £1,000 per year. If rental income in a tax year does not exceed these thresholds, reporting the rental income on a tax return is not required.
Responding to HMRC Letters
If you receive a letter from HMRC, respond within 30 days. Do not sign the certificate of tax position enclosed, as it is not a legal requirement. The declaration on the certificate is not restricted to a specified period, so signing it could imply that you are asserting an unconnected matter is correct when it isn’t.
Planning Your Profit Extraction
Changes to Dividend Allowance and Tax Rate Threshold
In November 2022, Chancellor Hunt announced cuts to the dividend allowance and the additional tax rate threshold. Take these changes into account when planning profit extraction from your company. Many family companies spread shareholding over various family members to take advantage of the dividend allowance.
Dividend Allowance Reduction
The dividend allowance will be reduced from £2,000 to £1,000 on 6 April 2023 and further reduced to £500 on 6 April 2024. Anyone receiving dividends in excess of the dividend allowance must report that income to HMRC.
Alternative Profit Extraction Methods
Consider extracting profit from your company through rent, interest, or pension contributions. Pension contributions can be paid by the company on behalf of any employee or director, as long as the total remuneration package is reasonable. Employer contributions are tax deductible and don’t carry NIC.
Addressing NIC Gaps
Understanding NIC Gaps
Gaps in National Insurance Contribution (NIC) records may prevent individuals from receiving the full state retirement pension. A taxpayer needs 35 complete NIC years to receive the maximum state retirement pension and at least 10 completed NIC years to receive any state retirement pension.
Checking and Filling NIC Gaps
Check your NIC record on your online personal tax account on gov.uk. Investigate gaps in your NIC record and challenge HMRC to look for missing NI contributions or credits. It’s not uncommon for NI credits to be missed by HMRC. You can apply for NI credits in specific circumstances.
Voluntary Contributions to Fill Gaps
Voluntary contributions can be made to fill gaps in your NIC record, generally up to six years back. Currently, there is a special dispensation for specific age groups to complete gaps in their NIC record back to 6 April 2006. This opportunity closes on 5 April 2023, so act soon if you need to make up these old years with voluntary NIC payments.
For further support, contact Southside Accountants Wimbledon.
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