Cash-strapped landlords face tax return charges

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As many as half of landlords have not set aside cash to settle their tax bills as the deadline for self-assessment looms next week, a survey has suggested.

Landlords who earned more than £10,000 in property income (before expenses) or more than £2,500 (after expenses) in the 2021-22 tax year will need to complete a tax return and pay their tax bill by 31 January. Otherwise they will incur an automatic penalty of £100 – with bigger fines the later they file.

But with just days to go before the deadline, one in five still have yet to complete their tax return, according to a survey of 1,000 landlords carried out by property platform Hammock.

Many are also at risk of being hit by even bigger charges as 45pc have not saved any money for their tax bill, Hammock’s survey shows. Late payment results in a charge of 5pc of the tax due.  

Mike Hodges of accountancy firm Saffery Champness said landlords may be struggling to find the funds to pay their tax bills this year due to changes in tax relief rules which only came into effect in 2020.

Landlords used to be able to deduct mortgage interest from rental income to reduce the tax they pay, effectively giving higher-rate taxpayers 40pc tax relief on mortgage payments. Instead landlords now receive a tax credit of 20pc.

This works out at a loss “of up to £250 in tax relief for every £1,000 of interest”, according to Mr Hodges.

As a result, a higher-rate taxpayer with £10,000 of rental income and £5,000 of interest has seen their tax bill rise by 50pc from £2,000 to £3,000.

“In some cases the increased tax can even take a landlord into a loss position,” Mr Hodges said. “So a nice little nest egg has turned into a bit of a nightmare.”

Landlords who think they could struggle to pay their tax liabilities this year should contact HMRC as soon as possible to avoid the 5pc penalty on unpaid tax.

Mr Hodges said: “Providing you have done all you can to pay your tax bill, they are normally quite sympathetic to agreeing a ‘time to pay’ arrangement, typically over 12 months or so.

“But don’t forget that increasing interest rates mean that HMRC’s rate on tax not paid by 31 January is now at 6pc.”