Tax Tips for Landlords

What tax will I Pay when I buy the property?

When you purchase a property, you must pay ‘Stamp Duty’ Land Tax. The amount of tax you pay is calculated as a percentage of the value of the property.

The rates at the moment are:

• Properties worth less than £125,000 are tax-exempt.
• Properties worth between £125,001 and £250,000 are taxed at 1%.
• Properties worth between £250,001 and £500,000 are taxed at 3%.
• Properties worth between £500,001 and £1m are taxed at 4%.
• Properties worth between more than £1m and £2m are taxed at 5%.
• Properties worth more than £2m are taxed at 7%.
• Properties worth more than £2m bought by corporate bodies are taxed at 15%.

It is vital you include the cost of stamp duty in your budget when looking to purchase a property, the sum can total thousands – so avoid any nasty surprises further down the line. 

How much income tax will I pay?

The yields you gain from renting out your property make up part of your annual income, so are consequently subject to income tax.

The rate of tax you pay obviously varies depending on your overall taxable income. As a basic rate taxpayer, you will pay 20%, while higher rate taxpayers will pay 40%. In the current 2013/14 tax year, you pay the higher rate of tax on any earnings above £41,450.

It is a good idea to set up a different account for your rental income. If you do this, your assets as a landlord won’t be mistaken for any other income and expenses.

There is a somewhat common misconception that a property let only needs to be declared on a tax return once it is profitable. However, there is a £10,000 threshold for rental income at which point it must be declared, regardless of profit.

You should also declare any loss making properties in your portfolio. Although this has no immediate tax benefit, once the portfolio is profitable, you can offset these previous losses.

What are my allowable expenses?

Allowable expenses include:

• Interest on a mortgage taken out on the property;
• Buildings and contents insurance;
• Professional/legal fees;
• Council tax;
• Travel costs to collect rent;
• Maintenance;
• Advertising the property for rent

HMRC deems any costs needed to fulfil your duties as a landlord or keep the property in good condition to be “allowable expenses”.

Offsetting the costs, could help to considerably reduce your tax bill.

“Capital expenses” are not tax deductible however. These are expenses which boost the worth of a property, such as refurbishments or building a conservatory to provide more space for tenants. These kinds of costs cannot be deducted from your income tax bill. However, you might be able to offset these against any capital gains tax when you come to selling the property.

You can also claim a “wear and tear” allowance, If you decide to rent out the property on a furnished basis, this enables you to make a deduction of 10% of the net rent per year. To calculate the net rent you will get, take the amount of rent you receive and minus any costs you pay that a tenant usually would, such as council tax.

What tax will I pay when selling the property?

If you feel it is time to sell, you will almost certainly be liable for capital gains tax on any profit - this is the tax you pay whenever you dispose of an asset, such as a building, land or lease.

Every year, you’ll have an annual tax-free allowance, whereby you can make a certain amount of profit prior to the tax kicking in. In the 2013/14 tax year, this allowance is £10,900.

Basic rate taxpayers pay capital gains tax at 18%, but this amount grows to 28% for taxpayers in the higher rate bracket.

Even if you have relatively modest earnings from your salary, profits from the sale of a property may put you in the higher band.

Reducing capital gains tax

You can offset some of your expenses against your capital gains tax bill. These include:

• Solicitors and conveyancing fees
• Estate agents fees
• Expenses incurred when improving the property
• Advertising the property for sale
• Stamp Duty

Remember that you won’t pay capital gains tax on your primary residence. This is called private residence relief. If you have lived in the property you’re letting out at any time, you may be able to claim tax relief for the last three years of ownership.

Overseas properties

If you are a UK taxpayer, then any rental income or profits on sales of an overseas property are subject to the UK Tax rules – just as a UK Property would be. 

Disclaimer:

This article is intended to inform rather than advise. You should also seek full legal advice or visit gov.uk for more information.