Taxation for landlords is an increasingly complex area and, with several changes recently introduced and several still pending or in consultation phase, it’s very difficult to give specific advice when the goalposts are continually being moved.
This guide is intended as an overview of the main aspects of taxation that will apply to most landlords. For specific advice about your situation we would strongly recommend speaking to an accountant.
The golden rule here is you must declare to the Inland Revenue (HMRC) any income derived from property, even if you do not make a profit. Any profit made is taxable and it is effectively added to any other income you receive in the same tax year, your tax liability is then calculated relevant to your total income, but there are certain things that can offset your total liability.
If you make a loss in a tax year on income from a rental property, this tax loss can be offset against profits made on another rental property or against future profits derived from property.
Click here for advice on reducing void periods, property damage and rent arrears.Stamp Duty
If you own the property already this won’t apply to you, if not this can be a large expense that you should factor in to your purchasing budget. In fact, it’s substantially more expensive since the April 2016 budget changes which added an additional 3% for people purchasing a second property or BTL property.
Stamp Duty is calculated against the purchase price of the property, the rates for BTL purchases as of 1st April 2016 are:
The first £125,000 = 3%
Then a graduated rate is applied:
From between £125,000 up to £250,000 = 5%
From £250,000 up to £925,000 = 8%
From £925,000 up to £1,500,000 = 13%
Over £1,500,000 = 15%
Stamp Duty paid isn’t a deductible expense from your rental income, however, it can be used when you dispose of (sell) the property to reduce your capital gains tax liability (see later on).
Check out our Stamp Duty Calculator to easily get an accurate figure.Income Tax
As mentioned before, any income received from property must be declared to HMRC. Usually this is done via self-assessment. HMRC have a comprehensive guide for landlords which can be found here
Landlords who live outside of the UK must notify HMRC and apply for their rental income to be paid to them in full. Without approval from HMRC the letting agent or tenant is responsible for deducting income tax from the rent (at 20%) and paying over to HMRC quarterly. This applies to landlords who live outside of the UK for more than 6 months of the year – the same permission should also be sought by members of Her Majesties Armed Forces, as they may be subject to long-term overseas postings. To apply to receive the full rental income you can complete form NRL1i. Once approval has been given, pass your approval number to us and we can pay the rent to you without income tax deductions; you are then required to submit an annual tax return as usual to confirm your rental income and expenditure.
Working out deductible expenses to lower your tax liability is where things begin to get more confusing, mainly due to recent and looming changes.
If you have any questions, please go to our contact form and we will be happy to help.There has been a recent change (April 2016) to the 10% wear & tear allowance for landlords of fully furnished properties. This relief has now been removed and it has been replaced with a relief which applies to landlords of all unfurnished, part-furnished and fully furnished properties (but not holiday lets or corporate landlords), where the cost of replacement furniture can be offset against rental income, including:
- Movable furniture or furnishings, such as beds or suites
- Televisions
- Fridges and freezers
- Carpets and floor-coverings
- Curtains
- Linen
- Crockery or cutlery
- Beds and other furniture
This applies to replacement furniture only, not to initially furnishing a property before letting (although this can be treated as a capital expense and can be used to offset capital gains tax liability when selling a property).
In addition to the above, listed below are expenses that can be used to offset income tax liability, with one notable change on the horizon with mortgage interest:
- General maintenance and repairs to the property, but not improvements (such as replacing a laminate kitchen worktop with a granite worktop)
- Water rates, council tax, gas and electricity
- Insurance – landlords’ policies for buildings, contents and public liability
- Interest on mortgage payments for the rental property * (see below for pending changes)
- Costs of services, including the wages of gardeners and cleaners
- Letting agent fees and management fees
- Accountant’s fees
- Ground rents and service charges
- Direct costs such as phone calls, stationery and advertising for new tenants
- Vehicle running costs (only the proportion used for your rental business)
As mentioned previously, in recent budget statements the Chancellor has outlined plans that place a greater tax burden on landlords. The greatest of these are the plans to remove mortgage interest from the list of deductible expenses. This also changes the way in which your tax liability is calculated. If you are not a higher-rate tax payer this isn’t all doom and gloom as the relief is being replaced with a standard 20% tax credit, but these changes will impact all landlords to a greater or lesser extent.
The removal of mortgage interest relief effectively means that you will be taxed on your turnover (full rental income), rather than your profit and, for higher-rate tax payers (40% & 45%), the 20% tax credit only goes part way to make amends. This will see higher-rate tax payers with mortgaged buy-to-let property worse off and, for lower-rate tax payers who were previously close to the higher rate threshold, the full rental income will be added to your other income, meaning you may become a higher-rate tax payer as a consequence.
These changes are being phased in from the tax years starting from 2017 to 2020. The phased introduction is as follows:
2017/2018 = Full relief due on 75% of mortgage interest
2018/2019 = Full relief due on 50% of mortgage interest
2019/2020 = Full relief due on 25% of mortgage interest
2020/2021 = Only restricted relief available
Click here for advice on reducing void periods, property damage and rent arrears.There are some things you should consider that can lessen the impact of these changes:
- REMORTGAGE – If your property has a mortgage, make sure that you are paying the lowest rate possible. There are currently some great buy-to-let remortgage deals out there – if you would like to know more, please let us know.
- UTILISE YOUR SPOUSE’S PERSONAL TAX ALLOWANCE – If you have a spouse on a low or no income you could adjust the property ownership to keep any profit within their taxable allowance.
- CONSIDER BECOMING A COMPANY – Corporation tax is different to income tax and, at current levels, is lower than personal rates. Companies are taxed only on profit also, meaning you could be better off – income can be drawn from the company as dividends. This is a very complex area and needs specialist advice; you may encounter Stamp Duty liability transferring the properties to a company and be taxed on the whole profit when selling a property, rather than benefiting from relief with Capital Gains Tax.
- MAXIMISE INCOME – As well as lowering your mortgage payments by remortgaging, you can look to lower mortgage loan amounts. Also, you should pay close attention to the market and make sure the rent you are charging reflects current rental market conditions. We always reassess this and advise our landlords of the current market rent when renewing a tenancy.
- UTILISE ALL DEDUCTIBLE EXPENSES – Make sure you do offset your allowable expenditure each year. You need to make sure you keep accurate records of your letting-related expenses and you can forward-plan maintenance work to offset profit in years where you may have a greater tax liability. If you are in any doubt over what you can deduct you should speak to a specialist accountant.
If you have any questions relating to this or any other lettings-related matters, please go to our contact form and we will be happy to help.
Capital Gains Tax & Inheritance Tax
Depending on your long-term plans for the property you should consider the impact of both Capital Gains Tax – which will affect you if you decide to sell a rental property, or Inheritance Tax if you leave property to your family on your death.
Capital Gains Tax (CGT)is payable when you sell a property that is not your only or main home. The tax payable is calculated against the profit you make when selling – as mentioned earlier, you can offset capital expenditure here, for example Stamp Duty fees when purchasing the property, renovation work to improve the property etc.. You also receive relief (private residence relief) for any time where you have lived in the property as your main home. Individuals also receive an annual CGT tax-free allowance, which is currently £11,100. Any profit above this will be taxed at the prevailing rate.
Inheritance Tax
This is a tax on everything you leave in your estate when you die. The liability is calculated on any amount above the Inheritance Tax threshold (currently £325,000 for an individual or £650,000 for a married couple or civil partnership). This threshold is set to rise to £500,000 for an individual by tax year 2020/2021 with the allowance for married couples and civil partnerships rising to £1,000,000).
If you have a significant property portfolio you may wish to consider an Inheritance Tax planning strategy to lower the tax liability for your loved ones. Again, specialist advice is recommended here to take your specific situation into account.
If you have any questions relating to this or any other lettings-related matters, please go to our contact form and we will be happy to help.