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Buy to let taxation

Buy to let taxation

Buy to let Taxation


The regulations relating to taxation are complex and liable to change.

NO INFORMATION ON THIS WEBSITE SHOULD BE REGARDED AS TAX ADVICE

We recommend that you make your own enquiries with the Inland revenue or with a professional accountant to verify the position with regards your own tax situation

We are each responsible for declaring our income and paying the taxes that are due.
When you buy your first let property, you should inform the Inland Revenue by no later than 6th October, in the year following the tax year when you start. 

You should submit a tax return for the tax year in which the rental payments are due. You will need to complete schedule A; this schedule covers rental income from UK land and buildings. 

Single or Joint Ownership



If you put a property into joint ownership then the tax liability is shared. There are increased tax benefits if one of the partners is a non taxpayer.

It is easier and cheaper to sort out ownership at the outset. If you buy a property in one name and then decide to transfer ownership into joint names then there will be significant costs to bear.

If the property has increased in value substantially and you decide to change the ownership there may be capital gains tax to pay. Stamp duty may also be payable


Income tax

As a landlord you will need to budget for paying tax on your income

The way that income tax is calculated is changing

It is currently based upon your net profits (2016/2017) - that is your rental income less your mortgage interest less any allowable expenses. And the resultant profits would be taxed at your highest income tax rate so 20% for standard rate taxpayers and 40% for higher rate tax payers.

But this way of calculating tax is being phased out over a 5 year period

 

Buy to let Income tax2016/172017/182018/192019/202020/21
Current systemno change75%50%25%0%
New system 25%50%75%100%

 

The new tax calculation will take the gross rent, deduct any actual costs incurred in the maintenance of your property then deduct 20% (basic rate) tax allowance, based upon your outstanding mortgage

 

For example

(landlord is a higher rate tax-payer, income > 43k)

Gross rent  14,000 pa

Mortgage Interest 6,000

 lets assume allowable costs are 2,000

Taxable income = 14,000 - 2,000 = 12,000

Gross tax  = 40% of taxable income = 4,800 (40% x 12,000)

Less 20% Mortgage interest relief = 1,200 (6,000 x 20%)

Tax due = 3,600

 

Another example

(landlord is currently a basic rate taxpayer but gross rent will push him/her into higher rate tax bracket!)

landlords employed income is 40k (assume higher rate tax threshold is 43k)

Gross rent  14,000 pa

Mortgage Interest 6,000

lets assume allowable costs are 2,000

Taxable income = 14,000 - 2,000 = 12,000

Gross tax  = 20% of taxable income (43k - 40k) = 600 (20% x 3,000) +

40% of balance = 3,600 (40% x 9,000)

Gross tax due 4,200

Less 20% Mortgage interest relief = 1,200 (6,000 x 20%)

Tax due = 3,000

 

Another example

(landlord is currently a basic rate taxpayer and the gross rent will NOT push him/her into the higher rate tax bracker)

Landlords income = 25,000

Gross rent  14,000 pa

Mortgage Interest 6,000

 lets assume allowable costs are 2,000

Taxable income = 14,000 - 2,000 = 12,000

Gross tax  = 20% of taxable income = 2,400 (20% x 12,000)

Less 20% Mortgage interest relief = 1,200 (6,000 x 20%)

Tax due = 1,200

 

 



If the property is in joint ownership then the tax liability is shared accordingly.

In determining whether an expense is allowable, the Inland Revenue say it should be wholly and exclusively used for the purposes of the rental business. For example, repairs, redecoration, cleaning, gardening and insurance are all allowable expenses. 

You should keep careful records of income and expenditure. You will need to submit accounts to the inland revenue either directly or via an accountant. This will be much easier if you keep proper records. 

It would be a good idea to open a separate bank account for your investment property. ALWAYS KEEP RECEIPTS and fill in your cheque book stubs with a description of the expense, you may not remember the purpose of those blank stubs when the day of reckoning comes. The Inland revenue can request sight of receipts and invoices!

Capital Gains Tax


When you come to sell or transfer your investment property the profit (or gain) you make may be subject to capital gains tax. (CGT)

The gain is broadly the sale price minus the purchase price. This net profit is divided between the owners accordingly

You can deduct various other expenses from the net profit. For example, you can deduct estate agents costs and solicitors fees. You can also deduct the cost of home improvement works - such as an extension. But you cant deduct the normal maintenance costs such as decorating

Each individual has an annual capital gains tax allowance (currently 11,100, 2016/17). If a property is held in joint names then you can both deduct your CGT allowance from the Capital gain which will leave you with the net taxable gain.


From 23rd June 2010 there will be two rates of capital gains tax 18% and 28%.

The rate you pay will depend upon your income for the year of disposal

The net taxable gain is added to your income.

If your total income goes above the higher rate threshold (43,000 for 2016/17) then that portion will be taxed at 28%. Any CGT income below the threshold is taxed at 18%

 

For example, Mike and Sally buy an investment property in 2006 for 80,000. They sell the property in January 2017 for 150,000. Ignoring any home improvement costs, estate agent fees etc, a profit or gain of 70,000 is crystallised.

 

The gain is divided equally between the two owners at 35,000 each

In the above example, Mike and Sally can deduct 11,100 from their profit to give a net taxable gain of 23,900 each

Mikes annual salary is 22,000 pa.

We add to this his capital gains of 23,900 to give total income of 45,900.

Assuming higher rate income tax threshold is 43,000

Mike will have to pay 4,592 in CGT (28% of 2,900 plus 18% of 21,000)


Capital gains tax can be paid straight away OR reported to the Inland revenue by completing the 'Capital Gains Tax' section of your tax return. Once the tax has been calculated you will be sent a statement of account.

Please note that capital gains tax is not due on any profit you make from the sale of your principal home. If a property has been used both as home and as a let property then profits are apportioned according to the time spent in either use. However exemptions may apply. Please contact the inland revenue to discuss your situation.

If you’ve received a Self Assessment tax return, follow the guidance to decide if you need to fill in the capital gains pages as part of that return. The return tells you how to obtain these pages if you need them.

If you don’t usually complete a tax return, but wish to report gains or losses, you should register for self assessment with the Inland Revenue before 5 October following the end of the tax year in which the sale completed

Inland revenue helpline 0845 9000 444

Inland revenue website www.inlandrevenue.gov.uk

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