Becoming a buy-to-let landlord is not only an effective way to generate a regular income, but if the property increases in value your asset can also be a good investment in the longer term. However, if you do find that you make a profit from your investment, either through rent or through selling it, there are several tax responsibilities to be aware of.
You must pay income tax on any profit you make from your property. The amount of income tax you pay beyond your Personal Allowance will depend upon which tax band your earnings fall into.
In 2017 you won’t pay any tax on any earnings up to £11,000. After this threshold you will pay 20% on earnings of up to £43,000, which is the basic tax rate. The higher rate of tax after this figure is 40% on your earnings, maxing at 45% for earners of over £150,000. On income of over £122,000 you do not get the personal allowance.
From April 2017, to be phased in over a four-year period, new rules are being implemented relating to the tax breaks that landlords can claim on mortgage interest payments. Previously, landlords could deduct a variety of expenses from the rent they receive on their rental property, to include mortgage interest. The change in landlord tax deductions will be applied irrespective of the type of mortgage the landlord takes out, whether that’s an interest only or a repayment mortgage. From April the amount of relief landlords can claim will be capped at the base tax rate of 20%.
With changes such as the above landlord tax deductions being rolled out, buy-to-let landlords are keen to look for ways to improve the bottom line. This might mean transferring property to a spouse or partner who falls into a lower income bracket for instance, but there are other allowable expenses to be aware of.
Landlord tax is payable on all profit from rental income made beyond your Personal Allowance. You might also make income from your tenant for the rental of furniture if your property is furnished, or charges for any particular additional services such as cleaning communal areas for instance.
If you let one or more properties you must gather together details of all the income you make from those properties to work out your taxable rental profit. From this you can deduct allowable expenses that are entirely associated with the purposes of letting out that property. You can offset any legitimate expenses against your rental income.
Commonly, expenses you can claim for include wear and tear on your property and general maintenance and repairs, but not improvements. How landlords calculate wear and tear has been revised in recent years and now landlords can claim expenses associated with repairs by deducting the cost of replacement items and the incidental costs of disposing of an item. To do this landlords must undertake the small administrative burden of documenting the associated receipts and costs. Further details about what constitutes appropriate wear and tear are outlined on the government paper .
Water rates, council tax and electricity can also be deducted from your tax bill as well as insurances such as landlords’ insurance and contents insurance. You can also claim professional services such as the fees of those who service your property, for example, your letting agent or accountant fees. A more detailed breakdown of the cost elements of running a property letting can be found on the Government website .
There are different tax rules for residential properties, furnished holiday lettings and commercial properties. For properties that qualify as Furnished Holiday Lettings (FHLs) special tax rules apply . You can, for instance, claim Capital Gains tax relief as a trader, and you are entitled to plant and machinery capital allowances for items such as furniture, equipment and fixtures. If you are to benefit from these rules you must work out the profit and loss from your holiday lettings separately from any other rental business you might undertake.
If you qualify as a landlord of commercial property, such as holiday lettings, it’s possible for you to claim capital allowances when you buy the assets you use to maintain your business. This might include particular equipment and machinery. You may be able to deduct some or all of the value of the item from your profits before you pay tax on your final calculation. Further details of what constitutes plant and machinery are detailed on the Government website . There are a number of exceptions to be aware of, such as doors, gates and shutters, so it’s worth becoming familiar with the details before making any claims.
When you sell a property and you make a profit on its sale (or a ‘gain’), it’s likely you will pay Capital Gains Tax on this profit. This tax applies when you ‘dispose of’ a buy-to-let property, business premises, land, or inherited property. Therefore there’s no specific Buy-to-let tax per se, but the rules are different to merely selling your own home. Essentially the amount of tax you pay on your property sale is based on the difference between what you bought and sold it for.
How much tax your buy-to-let sale incurs takes into account the overall gains you make beyond your personal allowance, minus any professional fees associated with the sale.
Increases in interest rates can have an impact on the amount of profit buy-to-let landlords can make. Significant increases can mean some landlords might consider raising their rents or selling a property or properties from their portfolio altogether. If a landlord finds that in selling a property they have made a loss then no Capital Gains Tax will be due as there is no profit to incur it.
The Goverment Capital Gains Tax Calculator can help you work out how much tax you need to pay when you sell your buy-to-let property. The calculator is informed by certain assumptions such as average house prices and the assumption that rents will remain level.
Any business owner, whether a landlord of a single property or a buy-to-let portfolio, needs to register with HMRC, even if any profit is likely to be less than the Personal Allowance threshold. You must submit a tax return each year by filling in a self-assessment tax form, which details all your other sources of income including any jobs for which tax has already been taken.
Keeping detailed records of the income and expenditure attached your property or properties is essential so you can accurately calculate what you owe to HMRC. Be aware of the deadlines for the submission of your tax return.
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