Landlord tax is an extensive subject, and one that is always changing. If it’s something that you naturally understand, take in and keep up with then you’re probably one of a lucky few. There’s many different strands to landlord tax and you need to be aware of them all if you are to get the most out of your buy-to-let investment financially.
Here’s a general overview of the main taxes that landlord must consider as of August 2019. If you need in-depth, tailored advice on landlord tax, seek professional help from a tax specialist.
What is Stamp Duty Land Tax?
If you buy a property over a certain price in the UK, you will pay Stamp Duty Land Tax. The amount you pay depends on how much the property is worth. Let’s take a look at the brackets.
In England and Northern Ireland, you pay Stamp Duty on residential properties worth £125,000 or more, and on non-residential properties or land worth £150,000 or more. In Scotland, you pay Land and Buildings Transaction Tax on residential properties worth more than £145,000 and non-residential properties worth more than £150,000. Scotland also has an Additional Dwelling Supplement which applies to properties worth more than £40,000. You pay this if you own a residential property and buy another.
In Wales, you pay Land Transaction Tax on residential properties worth more than £180,000 and on non-residential properties worth more than £150,000. If you already own a residential property and are buying another, then you’ll face additional charges for a residential property worth more than £40,000.
What about Income Tax?
It’s not just when you buy a property that you’ll pay tax. If you make money from letting a property, then you’ll also be subject to Income Tax. The rate of Income Tax that you’ll pay depends on how much money you’re making. In England from 2019-20, you won’t pay Income Tax if you earn less than £12,500 per year. Anything after that and you’ll pay the basic rate of 20% of the income up to £50,000. If you’re earning over £50,000, the higher rate of 40% tax applies. If you make more than £150,000 then you’ll pay the additional rate of 45%.
Landlords are entitled to a £1,000 tax-free property allowance, so if you make less than this on your buy-to-let property a year then you don’t need to tell HMRC. The self-assessment tax return can be a daunting task for many landlords. Remember, if you’re submitting it on paper then it must be done by the 31st of October each year. For online, it’s the 31st January.
If your letting activity is deemed as ‘running a property business’ then you might have to pay Class 2 National Insurance Tax. This usually applies if being a landlord is your main job, if you rent out more than one property and if you make more than £5,965 a year from letting.
If being a landlord is not your main job, then it might be worthwhile setting up a separate account for your rental income so that your various revenue streams don’t get confused. You might find this easier when it comes to working out your profit and your expenses.
What expenses can I claim back on?
Any costs that are deemed to be essential to you performing your duties as a landlord can be offset against your rental income which in turn, reduces your tax liability. Allowable expenses are things you need to spend money on as part of the day-to-day running of the property. These include letting agents fees, accountants fees, buildings and contents insurance, interest on property loans, money spent on maintenance and repairs, utility bills, cleaning and gardening services and more.
On the other hand, there are certain costs that you cannot claim back. These include the full amount of your mortgage payment (only the interest from your mortgage can be offset against your income), private telephone calls that aren’t related to the rental property and personal expenses that have nothing to do with the rental.
Do I pay taxes when I sell a property?
Yes, tax applies when you sell a property too. This is called Capital Gains Tax. Landlords are likely to have to pay this if they make a profit when selling a property that is not their home, such as a buy-to-let property .
Capital Gains Tax has seen a lot of changes over the past 10 years. At the moment, the rate applicable to profits made on the sale of a property is 28% and this amount is payable irrespective of whether a landlord intends to reinvest these profits. If you want to work out how much Capital Gains Tax you might have to pay, HMRC have a handy tax calculator.
There’s a lot that comes with landlord tax – more than this guide could cover. To make things more complicated, the rules and regulations are updated regularly, so it can be a task trying to stay on top of what’s going on.
It’s definitely important however to be in the know, as cutting corners and doing things wrong will probably have a negative effect on you financially. Make sure you seek professional advice if there’s anything you’re not sure on.