Becoming a landlord can be a big step or something you fall into. A landlord is the owner of a property that is rented out to others, short or long term. Either way you need to consider the ongoing position carefully: –
If you would like help with planning, Tax returns, Bookkeeping, mortgages or a Financial Advisor then do contact us for help.
Types of Rental
To appreciate and understand the rules and taxes you ﬁrst need to understand the main types of rental:
There are various ways you can exploit you own home for the purpose for proﬁt, but this category is speciﬁcally for furnished living accommodation that you share.
Rent a room relief gives a £7,500 annual exemption from reporting and paying tax on such income. If this threshold is exceeded, then you need to report total gross income on your personal tax return; where you can then claim a deduction for either actual expenses or the £7,500 rent a room allowance.
Residential property that you buy, or keep, for the purposes of renting out, e.g. houses or ﬂats, is generally called buy to let and is the principal type of property that we are looking at in this guide.
HMRC will want to see furnished lettings separated from unfurnished lettings income.
There are special rules available for furnished accommodation let short term for holidays etc. If you can fulﬁl the conditions, then such income may be treated as business income instead of investment income and hence be available for some loss reliefs, and capital allowances on equipment.
To qualify, the property must be
Days you stayed there, or you let others stay there at non-commercial rates, do not count. There are special rules if, in one particular year, a property fails to maintain these.
If you rent out property for commercial use then this is commercial property e.g. shops, business units etc. VAT may be charged on the purchase of such a property. Here is good read on Why Should You Invest in a Commercial Property?
You may exercise the option to tax such property and hence charge VAT on rents etc. but care should be taken as this is a complicated process that cannot be revoked easily. If you are thinking of this then do talk to us to see if it is beneﬁcial to you.
Some properties, especial student lets, are rented out on a house share basis i.e. to at least 3 people from diﬀerent families, who share facilities. Such a property is classed as a House in Multiple Occupancy (HMO) and is subject to special rules.
You will need to check your local council rules and budget for extra costs and delay for certiﬁcation and inspections etc.
There are lots of other types of income from land that have no special rules – they are just taxable income from property that need to be reported on self-assessment tax returns, and will not speciﬁcally be covered here e.g.
Once you have decided what sort of a property you are going to own and how you are going to rent it out then you need to get all in place before the ﬁrst tenants move in.
Few properties are 100% ready for habitation, especially by tenants who may call you out for any repairs. Further costs you may need to budget for, before tenants move in, are as follows:
Before taking on your ﬁrst tenant there are lots of documents you will need to consider drawing up or obtaining: –
The property you are renting out will need ongoing management, even if that is just checking that the rent and insurance have been paid. Any lease or tenancy agreement should state who is responsible for what, you as owner or the tenant, or maybe a resident’s association or the landlord of a block of ﬂats. You may choose to delegate tasks to a managing agent or do them yourself as follows:
On a regular basis you should be collecting rental income for your property investment. From this you need to pay regular running costs including loan or mortgage repayments.
Income tax will need to be paid on annual proﬁts from property, but taxable income may or may not be after deduction of mortgage interest and will not be after deduction of any repayments of loan capital.
At some stage you may want to sell your investment. When you sell a property then you may receive more or less than you paid for it. The diﬀerence between selling price and purchase price is your basic capital gain.
Costs of buying and selling are allowable deductions from this gain before it is taxable.
If you have improved or enhanced the property these costs may also be deductible e.g. new conservatory or extension to a ﬂat lease. So do keep a note of these costs as they incur, as evidence for deduction at point of sale.
There is no deduction for ﬁnance costs – loans or mortgages.
HMRC insists that you declare all income gross, but what you claim as expenses is up to you. You can claim any running costs incurred by you for the property, wholly and exclusively. What you claim must be justiﬁable as being for the property and must not include, or otherwise actively disallow any private element.
Some costs may be associated with obtaining title to the property, rather than being running costs. Such expenses are not deductible from income but may be deductible from the Capital Gain on sale e.g. Solicitors fees on purchase of the property or extending the head lease to a ﬂat.
Here are the main categories of expenses you may consider claiming: –
If you pay rent or ground rent for the property, then this is an allowable deduction from income received.
You may pay the council tax or business rates, and if you do then this is an allowable deduction, also water rates.
Property insurance is tax allowable, as are warranties or breakdown cover for boilers etc. Life insurance premiums for mortgages are not allowable deductions.
Cost that you as landlord are charged are also tax deductible from the income for that property, e.g.
It is usual for the tenant to arrange and pay for utilities, but if you do pay these bills for the property, e.g. between lets, then you can claim them as a deduction for tax purposes.
Property upkeep costs that you pay for are also tax allowable. This may be regular gardening or one-oﬀ cleaning between tenants.
If you provide any other services to your tenants or property, then the costs of these are also tax allowable,
e.g. telephone, cable, satellite.
You may be able to claim some expenses for necessary visits to your property, so do keep records and discuss this with your DNS Accountant.
Works on the property, especially refurbishment works, will count as one of the following: –
Repairs – repairing an existing something to bring it back up to original purchased quality g. painting & decorating, a replacement bathroom or ﬁtted kitchen, new roof, replacing old windows for double glazed ones, mending the boiler. These are tax allowable by deduction from taxable income.
Renewals – replacing a whole something that the property already had g. bed, freestanding cooker, curtains. These are tax allowable by deduction from taxable property income. Diﬀerent rules apply for businesses.
New ﬁxtures, ﬁttings & furnishings – there is currently no tax relief available for the ﬁrst-time purchase of furniture or equipment for a dwelling< Improvements – adding to your original purchase e.g. new conservatory, loft extension, adding a bathroom, putting in a new luxury This can include initial renovation costs if your purchase was not in a habitable state. These costs count as improvements to your original purchase so are tax deductible against the investment gain on sale of the property, not against income.
Capital allowances may be available for plant and machinery for a commercial property or ladders and tools etc you may use on rental properties that are not part of the property being rented out e.g. a Scaﬀold tower. Capital allowances are not available for equipment etc in residential property unless FHL.
Professional fees for the property may be tax deductible, but need to be attributed to either income or sale/purchase to be deducted from the capital gain on sale.
Advertising and marketing for tenants or guests is tax deductible from income. Selling costs are deductible from the capital gain on sale.
Any other costs you can directly attribute to the property may also be tax deductible e.g. stationery, phone calls, association membership.
Tax reliefs are available for all costs of obtaining, loans to purchase property or release equity including interest, arrangement fees, bank charges, but not capital repayments. The purpose of the loan is key and it should be transparent to track.
These costs are mostly deductible from income before tax, however the rules for loan interest have changed recently for income tax on residential property income.
From April 2020, 20% of the interest may be deducted, as a credit from the income tax bill, instead of an income deduction. Note this can have a knock-on eﬀect on other taxes e.g. student loan and child beneﬁt repayments.
Alex lets out a property, which is subject to a large mortgage with an annual interest charge of £36,000. He just covers the interest payment with £36,000 as rent received per year. Alex’s salary is £28,000, so he pays income tax at 20%.
The below calculation compares Alex’s tax position if the property were commercial (the same as the old rules), with residential property which is subject to the new interest rules from 2020/21.
We have assumed the personal allowance is £12,500 and the basic rate band is £37,500.
|Commercial (and old rules)||New Residential 2020/21|
|Total net income||£28,000||£64,000|
|Basic rate band limit||£37,500||£37,500|
|Tax charged @ 20%||£3,100||£7,500|
|Tax charged @ 40%||Nil||£5,600|
|Tax credit on interest at 20%||Nil||(£7,200)|
|Total tax payable||£3,100||£5,900|
In 2020/21 all of the mortgage interest on residential property is disallowed. This increases his taxable income but not his actual income. His higher taxable income means he pays tax at 40% because his total income is over £60,000. Alex receives a tax credit to set against his tax liability, which is calculated as 20% of the lower of:
Alex makes no actual proﬁt on his lettings business, but in 2020/21 the residential letting business makes a taxable proﬁt as the interest payments are disallowed. He thus pays tax of £2800 on the residential lettings business, although there is no cash available to pay that tax.
Stamp Duty Land Tax (SDLT)
Stamp Duty Land Tax (SDLT) is a tax paid when properties change hands. It is paid by the purchaser, based on land or property value, location and nature (residential or commercial). It is due within 14 days with penalties and interest for late ﬁling or payment.
There is 3% surcharge if this is not the only residential property owned, or a residential property is being purchased by a company.
Also, from April 2021 there will be a 2% surcharge if a residential property in England or Northern Ireland is purchased by a non-resident person or company.
|Band: Market Price £||Normal Residential Rates||Additional Rates||Company Rates|
|0 – 125,000||0%||3%||3%|
|125,001 – 250,000||2%||5%||5%|
|250,001 – 500,000||5%||8%||8%|
|500,001 – 925,000||5%||8%||15%|
|925,001 – 1,500,000||10%||13%||15%|
|1,500,001 and over||12%||15%||15%|
There are diﬀerent rates for commercial property.
|Band: Market Price £||Non-residential|
|0 – 150,000||0%|
|150,001 – 250,000||2%|
Check your SDLT at https://www.tax.service.gov.uk/calculate-stamp-duty-land-tax/#/intro
Income tax is generally payable on rental income but Buy-to-let landlords can oﬀset certain ‘allowable expenses’ incurred in the process of letting out a property in order to minimise it.
Income tax is charged on both annual investment proﬁts and trading proﬁts, at the usual rates of 0%, 20%, 40% or 45%.
National insurance may additionally be charged on trading proﬁts, at self-employed rates of 0%, 9% or 2%
Student loan repayment may also become payable at 9% on property income, and property income can trigger child beneﬁt rebate.
Take care over the impact of the new interest rules, as interest no longer reduces income before tax, so this change alone can take you into the next tax bracket and extra taxes on income.
There is likely to be a taxable Capital Gain on the sale of any property that has not been your main family home for the whole period of ownership. Capital Gains tax and returns are now due for submission and payment within 30 days of sale, as well as reporting on self-assessment personal tax returns.
Gains are split between beneﬁcial owners in proportion to underlying ownership, before being taxed
For a property that has at any time been your main family home then there is private residence relief that may reduce your capital gain before tax as follows: –
If a property, or part of the property, was treated as your main home either before, during, or after the time it was let out and you have been sharing the home with the tenant e.g. lodger, bed and breakfast etc. then there is a lettings relief such that the property gain is not taxable.
The old letting relief, for property let after you moved out, of up to £40,000 deduction per owner is abolished for sales after 5th April 2020.
There is an annual tax-free capital gains tax allowance (£12,000 for 2019/20), whereby the ﬁrst £12.000 of gains made in the year are not taxed.
Taxable gains are then added to income for the year of sale and taxed accordingly. Residential property gains are taxed at 20% if in the basic rate band and 28% if above; other gains, including those on commercial property, are taxed at 10% or 20%.
Remember if handing on a property at below market value e.g. as a gift, or when incorporating, then the capital gain is calculated based on market value not proceeds.
It is a good idea to plan, in advance, for this liability, to reduce taxes and avoid penalties. Talk to your DNS accountant about your potential liability.
Properties are investment assets so subject to inheritance tax whether in or outside a limited company shell, and hence subject to inheritance tax on death.
There are exemptions for gifts made more than seven years before you die, amounts left to your spouse/civil partner or to charities, and the value of your estate falling in the nil rate band.
This nil rate band is frozen at £325,000 until 6 April 2021, but any unused nil rate band may be passed on to your spouse/ civil partner. From April 2017 there will also be a property related nil rate band of £100,000 per person that can be set against a property that has been your home.
Hence, there are tax planning opportunities for handing property to the next generation, so do talk to Target Accounting.
When you have a rental property then you need to consider tenants as well as the property itself. You want good tenants who will:
Find out your rights and the tenants’ rights for the leases you put in place. Diﬃcult tenants will know the rules and so do not get caught out by them. And keep up to date.
What happens if you do not get paid? Is this covered on your insurance or by your agents? Can you evict tenants? Have you budgeted for the costs and the time it takes to go through the courts etc?
What can you deduct from deposits? What will you charge on to tenants?
The Government are always changing the rules so make sure you keep up to date with appropriate regulations for your property. Property Management Agents can be very useful in this respect.
Once you have a tenant then you will need to decide who does what.
Any property you buy will usually be a long-term investment. As such decisions you make today could have long range impact or no impact as the rules are continually changing
Personal circumstances can also inﬂuence what type of property is beneﬁcial for you
Remember to consider location. Can you keep an eye on it, is it in a good location to ﬁnd and keep tenants for income and appreciate in value for a capital gain?
Do keep your options open and review your position regularly.
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