One of the most confusing and daunting aspects of becoming a landlord can be getting to grips with taxes.
As a landlord it's important to fully understand your obligations when it comes to your taxes. This guide looks at everything from tax relief and allowable expenses to other landlord tax considerations like council tax, capital gains tax, stamp duty and corporation tax.
Understanding landlord tax relief and allowable expenses
As a buy-to-let landlord, one of your primary goals will be to generate a solid income from your property.
But with ‘income’ comes ‘tax’. Of course, you only pay tax on profits generated from your rental property, so knowing what costs you can and can't deduct from your income is hugely important when working out your annual tax bill.
As with anything property-related, it pays to be organised and when it comes to tax, organisation and structure is everything.
What expenses can landlords offset against tax?
Functional expenses that fall under the running of your buy-to-let property are deductible from your income before calculating tax, including:
• Utility bills (if you pay them rather than the tenant)
• Buildings and contents insurance
• Costs of services, such as gardeners and cleaners (as part of the rental agreement)
• Letting agent fees
• Accountancy fees
• Rents, ground rents and service charges
• Direct costs such as phone calls, stationery and advertising for new tenants
However, any expense that increases the value of your property, such as fitting a new kitchen or bathroom, cannot be deducted from income tax.
Wear and tear on your rental property
Since 2016, landlords have been able to claim Replacement Relief for items in their rental properties.
That means you can:
• Claim tax relief on costs associated with replacing an item, capped at the cost of a ‘modern equivalent item’
• Claim tax relief on the cost of disposing the old item
However, you must:
• Deduct the proceeds of sale if you sell the old item
You can claim Replacement Relief when replacing:
• Moveable furniture in your rental property
• Carpets, curtains, rugs and other linen
• Major appliances like cookers, hobs, fridge-freezers and dishwashers
• Crockery and cutlery, plus other kitchen items
• Technology, including televisions
Mortgage interest tax relief
Changes to how landlords claim mortgage interest tax relief were phased in between April 2017 and April 2020.
Under previous rules, landlords could claim mortgage interest payments as a deductible expense. But since April 2020, they must claim a basic rate tax credit at 20%
That means a landlord in the basic 20% tax band earning £800 per month in rent and with mortgage interest payments of £500 per month would have a taxable profit of £9,600, before any other deductible expenses. The 20% tax credit on their £500 monthly interest payments would be £1,200, so they would be facing a tax bill of £720 (20% of £9,600 less £1,200). Under the old rules, their tax bill would still have been £720.
However, those same figures applied to a landlord in the higher 40% tax bracket would see them face a tax bill of £2,640.
Under the old rules, their tax bill would have been £1,440 – £1,200 less.
Stamp duty rules for landlords
Since 2016, landlords have had to pay an additional 3% stamp duty surcharge on top of the standard rates.
Currently, under the English stamp duty ‘holiday’, the first £500,000 of a property’s purchase price is exempt from stamp duty, meaning landlords would pay only the 3% surcharge. That means a property costing £500,000 would command a stamp duty bill of £15,000 – £15,000 less than under the old rules.
From April 1, 2021, however, the stamp duty rules are set to change back to how they were prior to July 2020.
That means landlords will pay the following figures:
• £0-£125,000 purchase price: 3% stamp duty
• £125,001-£250,000: 5% stamp duty
• £250,001-£925,000: 8% stamp duty
• £925,001-£1.5million: 13% stamp duty
• £1.5million +: 15% stamp duty
Capital gains tax for landlords
If you decide to sell your rental property and it’s grown in value since you bought it, you may be liable for capital gains tax (CGT).
You pay CGT on the gain – which is the difference between the price you paid for your rental property and the price you sell it for.
So, if you bought it for £300,000 and sell it for £400,000, you’d be liable for capital gains tax on the £100,000 difference.
Capital gains tax allowance
The tax-free allowance for capital gains tax (CGT) for the 2020-21 tax year is £12,300, meaning you pay no tax on the first £12,300 in profit you make from the sale of your rental property.
Capital gains tax rates for landlords
How much capital gains tax (CGT) you have to pay when you sell your rental property depends on your total taxable income.
If you are in the higher rate of income tax (£50,000 - £150,000), or the additional rate (£150,000 +), you’ll pay 28% in CGT from the sale of your property.
If your income falls into the basic rate of tax (£12,500 - £50,000) and doesn’t exceed £50,000, you’ll pay 18% in CGT from the sale of your property.
Corporation tax for landlords
If your rental property is let out through a limited company, you’ll need to pay corporation tax on your profits.
The current rate of corporation tax in the UK is 19%. You may also have to pay income tax on money you draw from your property business either through a salary or company dividends.
Is a landlord responsible for council tax?
If you’re a landlord letting out, or preparing to let out, a property to a single tenant or joint tenants under one agreement, they are responsible for paying council tax while they live in the property.
However, if your property is a House in Multiple Occupation (HMO) where tenants rent rooms under separate tenancy agreements, you are responsible for paying council tax on the property as its landlord.
Overseas or non-resident landlord tax
If you live abroad, but rent out a property in the UK, you’ll have to pay tax on the income.
Anyone living abroad for six months of the year or more is classed as a ‘non-resident’ landlord and you would need to pay your tax either through an annual self-assessment tax return or through your letting agent deducting what you owe from your rent.
Parkers recommends seeking advice from an independent financial advisor or tax expert before making any decision on how to structure your buy-to-let portfolio.
As a landlord, keeping abreast of tax is key – we’ve rounded up all the key points around changes to property tax in 2021.
And if you’re thinking of becoming a landlord in 2021 and investing in property for the first time, here’s everything you need to know.