Being a landlord in the UK comes with certain tax responsibilities, some more complex than others. We’ve outlined some of your basic obligations as a property owner in this article.
For anything you’re unsure of, feel free to contact us here at Neil Smith Accountancy. Our expertise in this field will not only keep the HMRC on side, but help you make substantial savings as well.
Here is what all landlords should know about taxes.
Any rental income received from a property is taxable and must be included on your self-assessment return. This is when it begins to generate income of:
- £2,500 – £9,999 after allowable expenses, or
- More than £10,000 before allowable expenses.
Note that the HMRC still expect to be informed when you acquire an additional property, even if it brings in less than £2,500 annually; net income less than £2,500 pa can be taxed directly through HMRC using your tax code.
The tax rate is then calculated in correlation with your current income tax band, as outlined in the table below:
|Rate||Tax year 2016-17||Tax year 2017-18|
|Basic Rate (20%)||£0 – 32,000||£0 – 33,500|
|Higher Rate (40%)||£32,001 – 150,000||£33,500 – 150,000|
|Additional Rate (45%)||Over £150,000||Over £150,000|
To reduce your outgoings, the HMRC allows ‘allowable expenses’ to be deducted from your taxable rental income. This will reduce your taxable profits and save money.
Allowable expenses include:
- Interest on buy-to-let mortgages
- Council tax and insurance
- Utility bills
- Repairs and maintenance (excluding extensions and conversions)
- Legal fees, such as letting agency fees
Here at Neil Smith we can identify every potential saving, no matter how small, to help your buy-to-let investment become as profitable as possible.
Landlords should already be aware of the tax relief cuts available on buy-to-let mortgages. Announced in 2015, they cap the amount of relief to the basic rate of 20% regardless of your actual tax rate. There’s also a reform of the old ‘wear and tear’ tax, which you can find more about here.
These changes are currently being phased in, meaning that landlords have time to adjust. However, if you’re still unsure of anything, we can advise on how to prepare for the new system.
Stamp Duty Land Tax
From April 2016, individuals buying additional residential properties are required to pay extra stamp duty land tax. This itself depends on the property value, shown in the table below:
|Property Purchase Price||Rate of Stamp Duty|
|Up to £125,000||3%|
|Over £125,000 to £250,000||5%|
|Over £250,000 to £925,000||8%|
|Over £925,000 to £1.5 million||13%|
|Over £1.5 million||15%|
More details regarding stamp duty on additional homes can be found on the government website here. The regulations are different in Scotland.
Landlords should also be aware of the capital gains tax – paid on a sale if the property has gained in value – and inheritance tax, which largely depends on your personal circumstances.
To get around the new tax relief changes as noted previously, some landlords have moved their portfolio into a limited company or transferred them to an associate in a more desirable tax band.
We can advise if this is the right thing for you, as well as any further information on how to reduce your tax outlay. Feel free to get in touch with us today.
If you’re just beginning your property portfolio, you might be interested in learning what these 8 financial terms mean.