Mortgage relief is an even bigger issue now interest rates are soaring. A Common pitfall is seeing people claim all mortgage payments including the capital repayment element

 Many with rental properties will have associated mortgages. Some will be interest only while others include capital repayment. When preparing property income and expenditure accounts and completing the UK Property pages of the Tax Return what should be considered?

 Firstly mortgage interest is taken into account. However, the method of relief has changed in recent years in order to prevent tax relief on finance costs exceeding basic rate tax. In order to achieve this mortgage interest needs to be identified and entered in the specific box for residential property finance. This will ensure the correct tax treatment. While entering the finance costs in the wrong box won't affect the final tax calculation of a basic rate taxpayer the impact on a higher or additional rate taxpayer can be significant. For example, a higher rate taxpayer with mortgage interest of £6,000 per year should only receive tax relief at 20%, £1,200. If the amount were entered in the wrong box tax relief of £2,400 would be given. While the idea of 'accidently' achieving an additional £1,200 of tax relief may be appealing the potential for penalties and interest in addition to repaying amounts owed can quickly add up.

 With interest rates rising and tax bands being frozen more landlords will be pulled into higher rates of tax and finance costs will represent a significant expense. Ensuring these are reported correctly is essential.

 A common pitfall when speaking with landlords who complete their own property reporting is in connection with mortgages which include a capital repayment element (rather than just interest only). They will happily tell you they don't have any tax to pay on rental income after deducting their mortgage repayments. Unless they have a shockingly high interest rate and strangely low rent charge alarm bells start to ring. It is important to remember the capital element of a mortgage repayment is not a deductible cost for letting income. Just how much of an error could this create on a small letting income?

Letting income (yearly)

£12,000

Monthly mortgage repayment*

£1,000

Surplus

£0

*Interest element

£350

*Capital element

£650

 Imagine the individual had employment income and paid tax at the higher rate, they also entered the mortgage repayments in the wrong box so it wasn't treated as residential property finance.

 The actual tax bill should be £3,960. If this mistake was repeated for just a few years and then detected the amount due to HM Revenue & Customs could easily be over £20K when penalties and interest are added.

 We hope you have found this article useful. If you have letting income and would like to see how we can help you and give piece of mind please give us a call or send us a message.

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