Tax Laws For Landlords
If you own property and rent it out, tax laws can be quite complicated and they are often updated. Here is a quick guide to help you understand what you are liable to pay. Please note that this information is correct as of 19th February 2018 and due to regular changes in policy we advise that you get in touch with us to make sure that you are kept fully up to date with your taxation responsibilities.
PAYING INCOME TAX
When you start letting a property you may be liable to pay Income Tax and if you don’t you could be liable for a penalty. All profits made from letting property are part of your income and therefore subject to Income Tax, the amount you owe will vary depending on if you are a basic, higher or additional rate tax bracket.
It’s important to remember that only PROFITS are liable for income tax and that you deduct ‘allowable expenses’ first to calculate your taxable profit.
To calculate expenses, you need to understand the difference between revenue and capital expenses:
Revenue: revenue expenses relate to the day-to-day running and maintenance of the property and can be offset against an income tax bill.
Capital expenses: expenses that increase the value of the property, such as renovations. These can’t be deducted from your income tax bill, but you may be able to offset them against Capital Gains Tax.
Any costs that are deemed to be essential to you performing your duties as a landlord can be offset against your rental income. Allowable expenses are things you need to spend money on as part of the day to day running of the property, including:
- any letting agents’ fees
- legal fees for a year or less, or for renewing a lease for less than 50 years
- accountants’ fees
- buildings and contents insurance
- interest on property loans (although this is restricted)
- money spent on maintenance and repairs (but not home improvements)
- utility bills
- rent, ground rent and service charges
- council tax bills
- any services you pay for, such as cleaning and gardening
- any other direct costs incurred, such as phone calls, advertising or stationery
Things that you can’t claim as allowable expenses include:
- the full amount of your mortgage payment - only the interest element of your mortgage payment is allowable for tax, with higher rate tax relief now being restricted
- private telephone calls - you can only claim for the cost of calls relating to letting property
- personal expenses - you can’t claim for any expense that wasn’t incurred solely for your rental business
If your letting property is deemed to be ‘running a business’ (being a landlord is your primary job, you let multiple properties or you buy further properties with the intention of renting them out) rather than an investment then you may also be required to pay Class 2 National Insurance Contributions.
The profit threshold for Class 2 National Insurance Contributions is £6,025.
STAMP DUTY LAND TAX
As of the 1 of April 2016 if you are purchasing a second home or buy-to-let investment you need to pay an additional 3% in Stamp Duty Land Tax.
Rates for additional properties:
- up to £125,000 (3%)
- over 125k and up to 250k (5%)
- over 250k and up to 925k (8%)
- over 925k and up to 1.5 million (13%)
- over 1.5 million (15%)
CAPITAL GAINS TAX
Landlords will also need to pay Capital Gains Tax when they sell a property that has increased in value. The gain is calculated as the selling price minus the price the property was bought for (you can also deduct costs such as agents or solicitor’s fees and the cost of improvement works). There are tax reliefs available if the property has ever been your main residence.
TAX HELP FOR LANDLORDS
If you are letting a property or multiple properties in Sussex, East Sussex, West Sussex or the South East of England and need help to understand your tax liabilities as a landlord, please get in touch with our Tax Partner Robin Stevenson
Robin Stevenson - Tax Partner
Tel: 01825 763 366
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