Income Tax - Keeping landlords up to date


The famous Benjamin Jackson quote claimed the only things certain in life are death and taxes - however, with the ever-changing tax rules impacting landlords, it’s vital you keep up to date. Here’s our guide to some of the taxes impacting landlords:

STAMP DUTY

When you purchase a property as a landlord, then you’ll be liable to pay Stamp Duty Land Tax.  Since 2016 landlords have faced a higher rate of Stamp Duty, compared to those who purchase a house to live in.

Stamp Duty rates are set in tiers, and that means depending on how much you purchase the property for, the rate will be different:

Value of the property

Stamp duty rate

The first £125,000

3%

£125,001 - £250,000

5%

£250,001 - £925,000

8%

£925,001 - £1,500,000

13%

£1,500,000 +

15%

 

Note: This doesn’t mean you’ll pay 8% (£22,000) on a property priced at £275,000, for example – you’d pay 3% on the first £125,000, and 5% on the next £124,999 and 8% on the remainder – which in this case is £12,000.

The easiest way to calculate the rate is to use an online stamp duty calculator such as the one provided by HMRC https://www.tax.service.gov.uk/calculate-stamp-duty-land-tax/#/intro .

It’s important to remember that the amount of stamp duty you pay can be used to reduce your Capital Gains Tax liability when you sell the property.

 

INCOME TAX

All income generated from letting out property must be declared to HMRC

Around two thirds of landlords who receive income generated from property do so as a supplementary income stream, rather than their main source of income. This means that many landlords must complete an annual Self-Assessment declaration even though they pay income tax on their main job via PAYE. 

Which expenses are reasonable and allowable

When you complete your Self-Assessment, you can offset reasonable and allowable costs against the income generated, which will in turn reduce your overall tax bill. 

Allowable costs include:

  • Agency fees – including management costs
  • Insurance – including buildings, contents and rent guarantee
  • Repairs and maintenance costs
  • Accountants fees
  • Legal fees which are relevant to the property

Plus, if there have been any void periods in the financial year, then any utility bills or council tax which you have incurred can be offset against your tax liability.

What you need to know about Mortgage Interest

As a landlord, you can claim some of the interest on any mortgage you have against it – for now.

However, this is one of the biggest changes for landlords.  That’s because the amount of relief a landlord can claim is reducing.  In the tax year starting 5th April 2019, it is limited to 25% of the interest paid on a mortgage and will be eliminated all together in 2020/2021.

Wear and Tear

Until 2016, landlords were able to claim an amount equivalent to 10% of the rent they received for wear and tear.  However, this has been replaced, and instead you can claim tax relief against the cost of replacing furniture and furnishings.

That means if you have a furnished property and need to replace a sofa, or want to upgrade a bathroom, then you can offset the costs of this against your tax bill.

You must ensure you keep a full record of all of the relevant receipts for six years because HMRC can ask to look at these at any time.

 

CAPITAL GAINS TAX

When you come to sell a buy-to-let property, you are liable for Capital Gains Tax on the increase in value of the property. 

You do get a tax-free allowance before any Capital Gains Tax is payable.  This amount is set by the Government and can change.  The rate for the 2019/2020 tax is £11,900.  This means if the property has grown in value by up to £11,900 then there is no Capital Gains Tax to pay. It’s also worth noting that if the property is owned by more than one person, for example if both you and your partner are listed as owners, then you would both take advantage of the Capital Gains Tax allowance meaning no tax would be payable if the value has grown by up to £23,800.

If the property grows in value by more than these amounts then you will be liable for Capital Gains Tax on that increased value.  Higher rate tax payers will be liable for 28% of this increase, and basic rate tax payers will pay 18%. 

However, there are a number of exemptions that can be applied to help to reduce your Capital Gains Tax bill.

For example:

  • You’ve lived in the property yourself at some time
  • If the property was bought within the last three years
  • If you incurred certain expenses, such as legal fees
  • If you made a loss on your rental property in a previous year

Additionally, the amount of Stamp Duty Land Tax you paid when you purchased the property can be offset against the increased value.  Therefore, if you had a Stamp Duty tax bill of £12,000 when you purchased the property then this can be deducted from the value on which the Capital Gains Tax liability is to be calculated.

 

If you would like specialist Tax advice about your property portfolio, we can introduce you to advisors to look at your individual circumstances.