What You Need to Know About 2020/21 Landlord Tax Changes

We are now into the new financial year and there are new rules that directly affect the lettings industry. The 2020/21 landlord tax changes have come into force and you need to know about them. Whether you are a landlord yourself or a letting agent that deals with landlords every day, make sure you are up to date with these new tax rules for landlords to make sure you stay on the right side of the law.

The details that affect landlords the most in the tax changes are to do with mortgage interest tax relief and capital gains tax. Although these have been signposted for a while, busy landlords may have missed the warnings. Keep reading to find out what you need to know about 2020/21 landlord tax changes.

Changes to Mortgage Interest Tax Relief For Landlords

Whereas once landlords could claim the full interest they paid on buy to let mortgages for their rental properties against their profits, since 2017 the government has been slowly reducing the percentage allowable. From 2020/21, mortgage interest tax relief provides a tax credit based on just 20% of their mortgage interest.

This has been controversial, particularly amongst landlords who are higher rate taxpayers who have seen their tax bills rise year-on-year. Opponents of the government’s scheme argue that the entire mortgage interest on a rental property is a legitimate business expense and that they should be allowed to show it as such when it comes to filing their tax returns. However, the phased reduction has continued and is now complete as of this tax year.

Capital Gains Tax and the 2020/21 Landlord Tax Changes

There are also adjustments to the way you pay capital gains tax among the 2020/21 landlord tax changes. Previously, you could sell an investment property and declare any taxable profit in your next tax return, which allowed you a significant time in which to pay any liability. However, the new tax rules for 2020/21 require you to declare the sale and profits, and pay any capital gains tax you owe within 30 days of the sale.

For landlords who previously lived in their rental property, there are other adjustments when it comes to capital gains tax. Previously, they were exempt from paying capital gains tax for the period of time in which they were resident and the final 18-months of their ownership under private residence relief. This is reduced to nine months under the 2020/21 landlord tax changes.

These landlords also used to benefit from lettings relief of up to £40,000 on capital gains tax. But now to qualify for that, they must live in the property when it is sold. This means the numbers of property investors claiming this relief will be severely reduced, due to the new landlord tax rules.

A Tough Time For Landlords?

Although the 2020/21 landlord tax changes might cause property investors to have to shell out more money, the recent coronavirus pandemic may cause the government to act in a way that helps out landlords. These new tax rules for 2020/21 were in place a long time before the country shut down to stop the spread of Covid-19, without the knowledge that the rental sector would soon be facing potentially its largest ever challenge.

This could mean that further measures are on the way to avoid the need for landlords to sell up and further reduce the country’s housing stock. With many tenants struggling to pay rents and a temporary stop on evictions through the courts, some kind of stimulus package for the industry could be in order. However, we will have to wait and see what the coming weeks bring.

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