Landlords prepare income tax accounts for their rental profits in the same way as trading businesses, but some of the detailed rules are different. The rules will be changed with effect from the beginning of the current tax year, 2017/18, to allow landlords to use the simpler fixed mileage rates to calculate the deductible cost of business journeys by car, motorcycle or commercial vehicle, rather than having to calculate the actual cost of such journeys.
Income tax relief for interest against rental income is being restricted to the basic rate of tax, with the restriction phased in over four years. This began in 2017/18; in the second year of the new rules, 2018/19, only 50% of interest paid will be allowed as a deductible expense. The remainder will be eligible for a reduction in tax liability at 20%. The rules are complicated and can produce unpredictable results.
Annual Tax on Enveloped Dwellings
The annual tax charges on residential properties worth more than £500,000 that are owned through companies and other ‘envelope’ arrangements will go up for 2018/19 by approximately 3%, in line with inflation. The charge on a house worth between £500,000 and £1m will be £3,600 (up from £3,500); the maximum charge on a house worth over £20m will be £226,950 (up from £220,350).