In recent years, the stock market has had its ups and downs, the public are losing confidence in pension funds as a means of saving for the future and investors are increasingly looking at the UK property market. Buy to let has proved over the long-term to be a very successful investment, this involves investing in property with the expectation of capital growth with the rental income from tenants covering the mortgage costs and any outgoings.
When buying to let, taxation aspects must be considered:
Tax on rental income. Income tax will be payable on the rents received after deducting allowable expenses.
Allowable expenses are any costs that are essential to performing your duties as a landlord or maintaining the property. By offsetting these expenses against your rental income it could significantly reduce your income tax bill. Allowable expenses include:
• Interest on a mortgage taken out on the property
• Buildings and contents insurance
• Professional/legal fees
• Council tax, water rates & electricity if letting inclusive of utilities
• Travel costs to collect rent
• Administration costs of managing the property
• Agents fees for managing the property
• Maintenance and furnishings renewals
• Advertising the property for rent
The biggest misconception is that the full mortgage cost is deductible against the rental yield for the purposes of taxing the profits, this is not the case, it is only the interest element.
The rate of tax you pay depends on your total taxable income. If you’re a basic rate taxpayer, you’ll pay 20%, while higher rate taxpayers pay 40%. In the current 2019/20 tax year, you pay the higher rate of tax on any earnings above £50,000.
Tax when selling your investment. Capital gains tax (CGT) will be payable on the eventual sale of the property. The tax will be charged on the disposal proceeds less the original cost of the property, certain legal costs (including stamp duty paid) and any capital improvements made to the property. This gain may be further reduced by any annual exemption available (currently £12,500 per person) and is then taxed at either 18% or 28% or a combination of the two rates. CGT within 30 days of completion when you are also required to complete a CGT return (from April 2020)
Living in your rental property. If you have lived in the property you’re renting out at any time, you may be able to claim tax relief for the last nine months of ownership (previously
three years and then eighteen month). Imagine you owned a house for 10 years. During this time, you lived in it for two years and let it out for the remaining eight years. You would qualify for tax relief on 2.75 years of home ownership (the two years of your residence, plus the additional 9 months). This would mean only a portion of your profit from the sale would be liable for capital gains tax.
Changes in legislation. From April 2016 the wear and tear allowance for furnished properties was abolished and landlords are able to claim the actual cost of replacing furnishings in the period that the expenditure is incurred. From April 2017 individual landlords paying higher rates of tax (40% upwards) will no longer be able to obtain full tax relief on mortgage interest paid. This will be phased in over a 4 year period; by 2021 landlords will only be able to claim up to 20% tax relief on interest paid.
If you’re buying land or property, you’ll need to pay Stamp Duty Land Tax – more commonly known as Stamp Duty. The amount you pay is calculated as a percentage of the property’s value. The current 2016/17 rates are:
• Properties worth less than £125,000 are exempt
• Properties worth between £125,001 and £250,000 are taxed at 2%
• Properties worth between £250,001 and £925,000 are taxed at 5%
• Properties worth between £925,001 and £1.5 million are taxed at 10%
• Properties worth over £1.5 million are taxed at 12%
Second homes attract an additional 3% on the rate. This is only mitigated if you sell your main residence without replacing it within 3 years where you can reclaim a refund. Parents helping children with their first home are not affected if they are not named on the mortgage or deeds, they can be a guarantor or help with a deposit but must not jointly own the property otherwise they are caught. This is only applicable to residential property and therefore commercial property, land and some other property is not caught by the surcharge. Holiday homes abroad do not count towards your property count.
Contact Gavin Roberts at Maxwells Chartered Accountants today on 01278 423008
Member since: 2nd December 2016
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