Renting out a property on a private or commercial basis can be a great way to make an income, but alongside this comes tax liability. The good news is that you may be able to claim up to £1,000 for property income, as the government grants landlord tax allowances.
In this article we will be administering government-backed landlord tax advice, including what expenses you are required to pay, and where you can find additional must-know information you need in order to make the most of your investment.
Every worker in the UK receives an annual personal income tax allowance, on which they are not required to pay any income tax. This varies year on year. For 2017-18 the personal allowance is £11,500. If you earn anything above this threshold, you must pay income tax on your earnings. The rate at which you are taxed starts at 20% of your earnings, and increases up to 45% depending on annual income.
As a landlord, you’ll receive income from renting out your property. Therefore, you will be taxed on the profit you make once you have deducted any expenses associated with looking after your property, such as repairs.
If you own more than one property in the UK, you’ll need to combine the income and expenditure details on all of them and treat them as one business. If you make profit from overseas property, or if your property is commercial, furnished holiday accommodation in the UK or European Economic Area, there are other tax rules that you need to be aware of. Any profit relating to these properties must be calculated separately.
As a residential or commercial property landlord, there are a number of allowable expenses you can offset against your tax bill. These include the costs of maintenance and repairs to your property, various rates and bills, and any associated professional fees. To find out which landlord tax deductions you’re eligible for, visit the government website.
When you purchase a buy-to-let property, you’re making an investment. This isn’t only because of the income you’ll make from renting it out, but also because the value of your property can increase over time.
If you sell a property and you make a profit on it, tax may be due. This profit is known as a ‘capital gain’. It’s calculated on the difference between what you paid for your property in the first place and how much you sold it for, minus any transaction expenses.
There are some exemptions to Capital Gains Tax (CGT):
● If the property is your main residence then you don’t need to pay CGT
● If your total income (including the profit you make on the sale of your property) falls below the income tax threshold outlined above then this is tax-free. For this reason, some landlords stagger the sales of their properties to spread the impact of the CGT
If you rent out several properties, we recommend getting professional support to help with your tax and estate planning.
Historically, there has been a great tax advantage for those with a buy-to-let mortgage, as landlords were only required to declare rental income after covering their mortgage costs.
However, in April 2017 the landlord tax relief legislation was changed, and the amount of income tax relief that you’re able to claim on residential property finance costs (such as mortgage interest or interest on loans to buy furnishings), has decreased.
Eventually, this measure will restrict relief for finance costs on residential properties to the basic rate of income tax. In order to give landlords time to adjust, this change will take place gradually over four years, from April 2017 to April 2020.
As it stands, landlords are able to obtain the following tax relief:
● 2018-2019: 50% finance costs deduction and 50% given as a basic rate tax reduction
● 2019-2020: 25% finance costs deduction and 75% given as a basic rate tax reduction
● 2020-2021: all financing costs incurred by a landlord will be given as a basic rate tax reductionFind out more about these legislative changes in Landlord Tax Changes 2017
There are a lot of people who find themselves becoming ‘accidental landlords’. You might have become an ‘accidental landlord’ because:
● You own a property that is more affordable to rent out than sell
● You’ve inherited a property which you’ve decided to rent out to make some additional income from
If it’s the latter, you may find yourself needing to pay Inheritance Tax. This is the tax that’s payable on a property (as well as the money and possessions) belonging to someone who has died.
Among other stipulations, you won’t pay Inheritance Tax if the value of the entire estate you inherit is below £325,000. A standard 40% Inheritance Tax rate is charged only on the part of the estate that’s above this value threshold.
You are a non-domicile (or “non-dom) if you are a UK resident whose permanent home (or domicile) is outside the UK.
A domicile can either be the country your father considered his permanent home when you were born, or a place overseas you’ve moved to without the intention to return. That means you can be born, educated and a worker in the UK, and hold non-dom status. You might also inherit your non-dom status from your parents.
The non-domicile tax rule allows some UK residents to limit how much tax they pay on earnings from outside the country. To have non-dom status, an individual must pay tax on UK earnings, but they don’t have to pay tax on foreign income or gain unless that income comes into the UK. This includes income made from rental properties abroad. To help you with your tax planning, more details about tax thresholds for landlords with non dom status can be found on the government website.
The reverse of this scenario is that you live and work abroad while you’re renting out your UK property. You’re legally obliged to pay tax on rental income if you do so, and you must pay capital gains tax on the sale of a UK property where applicable.
If you live abroad for six months of the year, then HM Revenue and Customs will class you as a ‘non-resident landlord’, even if you are a UK resident for tax purposes.
To protect the income you make from your landlord business, you’ll want to make sure you have the right level of buy-to-let insurance for landlords. Get in touch with our professional advisers today, and they’ll help you find the best cover for you.