This tax guide explains everything about buy to let landlords. How to declare your rental income? How to register? What expenses can you claim? Is the online completion of a tax return challenging? How much tax will you have to pay?
All these questions and more will be answered in this guide so that you can pay your taxes accurately and without any delay. This tax guide will help you out with all the basics so that you can get your tax affairs sorted and also file your self-assessment tax return without any worries.
Tax penalties were increased significantly last year. Hence, it has become more crucial than ever to file your tax return promptly as well as get it right the very first time. So, without further ado, let us begin!
Register With HMRC
The very first step comprises selecting the right form and registering with HMRC. If you are sure that you need to file a tax return, it is crucial to inform HMRC. You will be required to fill the SA1 form.
You can carry out more HMRC registrations online on the official website. All the information you need to fill in this form is simple and straightforward, including your full name, address and date of birth. In addition to that, you will also require your National Insurance number.
Alternatively, if you wish to use paper forms, you can find the address on the form itself where you must send it to them on completion. The registration needs to be completed by 5 October of the following the end of the tax year.
For example, for tax year 6 April 2018 – 5 April 2019, you need to register with HMRC to pay taxes before 5 October 2019.
In case you are moving abroad but have decided to rent any UK property such as your old home, you must know that you still remain liable to tax on these rents. Moreover, you must also complete the self-assessment tax returns before the stipulated deadline.
In the same vein, you must consider if you wish to register yourself for the Non-Resident Landlords’ Scheme. In case you fail to register, your letting agent or tenant shall deduct tax from the total rent that you are due to receive. Then, you can claim for this tax to be offset against any tax that is owed on your tax return.
Once you are done with the registration, you will receive a confirmation from HMRC along with your UTR or Unique Taxpayers Reference. This unique reference represents all your tax affairs. You will be required to quote it on the payments or correspondence you make with HMRC. Moreover, they might also ask for your National Insurance number in case you call them with a query or clarifications.
Tax Return Basics
It is important to remember that a tax return must disclose your taxable gains and income for a specific taxation year starting on April 6th and ending on April 5th. Also, all your taxable gains and income should be declared on your tax return. This holds true even if you received them from before they were taxed (taxed at source) like bank interest or employment income.
Tax Return Submission
Following the tax year-end, you must submit the returns to HMRC. It is possible to submit the return on paper by October 31st. Alternatively, you can also file your return online, the deadline for which is January 31st at the end of the taxation year. If you fail to file your tax return in a timely manner, you will have to pay an automatic penalty of £100. There might also be additional fines according to the length of the delay.
The Payment Of Taxes Due
All the tax that you owe should be paid by January 31st by the end of each taxation year. You can pay HMRC in a number of ways such as Bank Giro, Online Banking, Direct Debit and much more.
As discussed above, you still need to declare the already taxed income on your tax return. That said, the tax that has already been paid at source shall be deducted before it arrives at the final version of the tax bill.
Note that in case not a lot of your tax has been collected at source or your total tax liability is more than £1,000, you might also have to make a tax instalment for the next year on January 31st. If you delay paying HMRC, again, it could cost you late penalty payments and interest.
It can be rather intimidating to attempt to complete a self-assessment tax return by yourself. Moreover, it is a rather time-consuming process with a lot of loopholes to consider. This is precisely where we can help you out. We can help you prepare as well as file your tax return without any fuss. All you have to do is share the information we request, sit back and relax. We’ll take care of it for you! To discuss further call us on 03300 887 912
The cost of buying a buy-to-let property
When purchasing a buy-to-let property, the costs include solicitors fees, stamp duty, mortgage brokers fees, and the bank’s mortgage application fee. These expenses need to be factored in when calculating the overall purchase costs.
Buy to let Stamp Duty Calculator
In England and Northern Ireland, stamp duty is applicable to property purchases over a specific price threshold.
In the UK, the current threshold for stamp duty charges is £125,000 for residential properties and £150,000 for non-residential land and properties. Properties purchased below these values are exempt from stamp duty charges.
The stamp duty tax in the given scenario is tiered based on the property’s value. For a property worth £400,000, the entire amount is not subject to a 5% stamp duty. Instead, the tax rates are as follows: 0% for the first £125,000, 2% for the amount between £125,001 and £250,000, and 5% for the portion between £250,001 and £400,000.
Stamp duty land tax is applied differently to first time buyers and those buying a second property.
Purchasing student property or care home rooms can help reduce buy to let stamp duty as they are considered commercial properties and are exempt from stamp duty for purchases under £150,000 in price.
From April 2021, those investing in UK property from overseas will be subject to an additional 2% stamp duty.
Income tax on buy-to-let
Buy to let tax rule changes
One important change to be aware of in the buy-to-let market is the removal of mortgage interest tax relief for landlords. Under the new rules, landlords will no longer qualify for this relief, but will instead receive a 20% tax credit for their mortgage interest payments. It is vital for prospective investors to consider this when making decisions about investing in the industry.
Capital Gains Tax is a tax levied on property owners who experience a rise in their property’s value between the time of purchase and sale. This tax is imposed on the profit made, with basic rate taxpayers subject to an 18% tax on the increase, while higher rate taxpayers face a 28% tax on the difference.
Before April 2020, landlords who rented out their former primary residence were subject to Capital Gains Tax only on the increase in property value during their absence. Additionally, landlords were able to include an additional 18 months of exemption for time spent at the property. However, as of April 2020, this exemption period has been reduced to 9 months. This change has implications for landlords in terms of the amount of Capital Gains Tax they may be required to pay.
Mortgage interest tax relief
Mortgage interest tax relief refers to the deduction that landlords used to be able to claim on their mortgage interest payments when calculating their tax. However, as of 2017, this relief has been gradually reduced and starting from the 2020 tax year, landlords are no longer able to deduct mortgage interest payments from their rental income. Instead, they can subtract a flat rate of 20% of their mortgage expenses. This change has impacted landlords’ ability to offset mortgage costs against their profits.
Should I buy in a company name?
Investors may choose to buy in a company name for tax purposes, allowing for potential tax benefits and deductions.
For example, if you were to buy in a company name, income generated through property would be subject to corporation tax. Corporation Tax stands at 20%, which is lower than the higher rate of Income Tax which is 40%.
When purchasing property as an individual, any income generated from it would be combined with your other earnings. This could potentially move you into a higher tax bracket, resulting in a higher tax rate. Instead of paying 20% on property earnings, you may find yourself paying around 40%.
If you purchase property through a company, you may be eligible to claim mortgage interest tax relief. This means you can deduct the amount you pay towards mortgage interest from your income when filing a tax return form.
One of the drawbacks of investing as a company is the limited availability of mortgage options. Additionally, if you withdraw money from your investments, it is subject to dividend taxation. This means that your income will first be taxed as corporation tax, and then again as dividend taxation. While this may not be an issue for those who are letting their earnings grow, it can become more expensive if you intend to use the funds for personal expenses.
Capital Gains Tax on buy to let
One strategy to potentially reduce capital gains tax obligations is by purchasing commercial property under £150,000. This may be achieved through investments in care home rooms or hotel room properties, which often offer high yields.
By acquiring these properties on a long-term lease with a fixed contracted rate of return, the likelihood of selling the property for a significant capital gain is minimized. Potential buyers would also seek the same consistent yield, reducing the chances of significant appreciation in value. This approach can help mitigate capital gains tax liability. However, it’s important to consult with a tax professional to fully understand the specific regulations and implications.
Frequently asked questions about buy to let tax
What is the income tax paid for overseas investors?
Every individual in the UK has a personal tax allowance of £12,500. Any earnings exceeding this amount will be subject to taxation.
If you are living abroad but earning income in the UK, there is a possibility that you won’t have to pay tax twice if your country has a double-taxation agreement with the UK. The agreement can provide you with either full or partial relief before being taxed or a refund after being taxed, depending on the specific terms. To find out if your country has such an agreement with the UK, you can check the U.K Government website.
Does a non-resident still have to submits a tax return?
When a non-resident in the UK purchases property, it is important for them to complete the NRL1 form. This form leads to the issuance of an NRL1 number, which should be presented to the lettings management company. It is worth noting that tax will not be deducted at source by the letting agent. However, it is a common misconception among non-resident landlords that they do not need to submit a tax return. This is not true, as an annual tax return must still be completed, even if no tax is due.
Do foreign investors pay inheritance tax?
Inheritance Tax is a tax that is applied to the estate of a deceased individual, which includes their property, money, and possessions. This tax is not applicable if the total value of the estate is under £325,000, or if the estate is left to a spouse, civil partner, charity, or community amateur sports club. The standard rate of Inheritance Tax is 40%. For example, if an estate is worth £500,000, then £175,000 would be subject to a 40% Inheritance Tax. However, if the home is given away to children or grandchildren, the threshold increases to £500,000.
If you are domiciled overseas and purchase property or hold money in a UK-based bank account, you may be liable for Inheritance Tax on those UK assets. This includes UK properties and funds held in UK bank accounts.
What is an HMO licence and when do I need it?
An HMO, or House in Multiple Occupation, refers to a property that is rented out to at least three individuals who are not from the same household. These tenants would have their own private room but would share common facilities such as bathrooms or kitchens. In England and Wales, landlords may be required to obtain a license to rent out an HMO property, depending on the regulations set by individual councils. Landlords should contact their respective council to determine the specific requirements.
According to regulations, if a house is rented to five or more individuals who belong to more than one household, it falls under the category of a large HMO. Consequently, all large HMOs must be licensed.
The HMO licence, priced at £1,100, has a validity of five years. It is granted on the condition that the property meets the standards for habitation. Landlords must ensure they possess updated gas safety certificates, install smoke alarms, and provide electrical safety certificates as necessary.