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There has been a shift in the buy-to-let landscape in the UK due to changes in regulation meaning that there is a greater need than ever to keep up to speed with the latest regulations and get expert advice on exactly how the finances will work your individual circumstance with any new property investment. We’ve put some key facts together to help you understand tax obligations when renting out property.
Rules on paying tax can be quite extensive and therefore complex – they are also regularly updated. We’ve created a comprehensive guide however we always recommend that you get financial advice from accredited financial advisors.
Paying Income Tax
Any profit you make from renting a property out is classed as part of your income and as such, profits are subject to Income Tax. The total tax amount is subject to your total taxable income including other potential income streams. If you have various income streams it might be worth setting a separate account up for your rental income. Having a new account will help with confusion and it may also be easier for you to work out your profit, costs and other forms of income.
Depending on your personal circumstances, if you’re eligible you may also be able to claim for Income Tax Reliefs – which means that you either pay less tax on specific items you have purchased or you can get a tax repaid. In some cases, tax reliefs are paid automatically, there are others, however, you must apply for to be eligible.
When calculating income tax and your profits you must take into consideration ‘allowable expenses’.
Revenue expenses: revenue expenses relate to the day-to-day running and maintenance of the property and can be offset against an income tax bill.
Capital expenses: any expenses that will increase the value of the property e.g. renovations. These cannot be deducted from the sum of your tax bill, but there is sometimes an opportunity to offset the cost against Capital Gains Tax.
Any costs that are deemed to be essential to you performing your duties as a landlord can be offset against your rental income, significantly reducing your tax liability. Allowable expenses are things you need to spend money on as part of the day-to-day running of the property, including:
-Letting agents’ fees
-Legal fees including renewing leases
-Money invested in maintenance and repairs
-Rent, ground rent and service charges
-Council tax bills
Recent Changes To Landlord Tax Relief
Wear and tear allowance: if you’re a landlord who provides furnished property then you can claim 10% net rent. The allowance can be used on any furnishings that you provide to your tenants. Net rent is the amount of rent you receive minus any costs that your tenant would usually pay e.g. council tax. As on April 2016, ‘wear and tear allowance’ for furnished properties will be swapped for a relief that allows landlords to deduct the cost they actually incur on replacing furnishings, appliances and kitchenware.
The relief given will be for the cost of a like-for-like or equivalent replacement (plus any costs incurred for disposing of or fitting).
Summer 2015 budget changes: As a result of the recent changes, the amount of tax a landlord can claim against as relief was capped at the basic rate of tax (20%) over the course of a four-year period.
These changes have taken into effect for all landlords regardless of the landlord’s tax bracket, meaning that landlords in the top tax brackets mortgage interest payments will be slashed.
Relief for finance costs was restricted to the basic rate of Income Tax from 6 April 2017. Finance costs include; mortgage interest, the interest of loans to buy furnishings and fees incurred when purchasing or repaying mortgages and loan products.
As a result, landlords will no longer be able to deduct all of their costs to arrive at their property profits. Due to recent changes, landlords will receive a basic rate reduction from their Income Tax liability. The scheme will be introduced gradually, meaning that:
-In 2017-2018, the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs. The remaining 25% is available as basic rate tax reduction
-In 2018-2019, this will change to 50% finance costs deduction and 50% given as a basic tax reduction
-In 2019-2020, this will change again to 25% finance costs deduction and 75% given as a basic rate tax deduction
-From 2020-2021, all financing costs incurred by a landlord will be given as a basic rate tax deduction
The planned introduction of the changes above, over the next four years should theoretically help landlords adjust. To find out more we suggest you do your research around the latest legislations.
If you are classed as ‘running a property business’, you may also be required to pay ‘Class 2 National Insurance Tax. You’ll need to pay this tax if your profits are over £5,965 a year. You’ll be considered as running a property business as a landlord if;
-Being a landlord is your primary job
-You let more than one property
-Acquire property with the intention of only renting them out (e.g. buy-to-let investment).
Stamp Duty Land Tax
Anyone purchasing a second home or a buy-to-let investment property will be required to pay an additional 3% in Stamp duty Land Tax – as of April 1st, 2016.
The rates for additional properties are as follows:
Purchase price: Up to £125,000 (3% rate)
Purchase price: Over £125,000 and up to £250,000 (5% rate)
Purchase price: Over £250,000 and up to £295,000 (8% rate)
Purchase price: Over £925,000 and up to £1.5 million (13% rate)
Purchase price: Over £1.5 million (15% rate)
Capital Gains Tax (CGT):
Landlords are required to pay Capital Gains Tax (CGT) at the point of sale if the property has increased in value. Capital Gains Tax is only payable on properties that are not the owner’s main residence. You can deduct the cost of agents’/solicitors’ fees and the cost of renovation work undertaken against CGT.
Disclaimer: The content of this page was last updated on July 29th, 2017. Whilst we’ve prepared the information within this page with care and have made every attempt to ensure that the information at the time is accurate, this information shouldn’t be relied upon as a substitute for formal advice. The information contained in this web page is for general information purposes only, we reserve the right to edit, discontinue or withdraw this, or any other report. Any use of this content for an individual’s own commercial purposes; is done entirely at the risk of the person making such use and solely the responsibility of the person making such reliance.