Whether it's income, stamp duty or capital gains tax when selling a buy-to-let property, as a landlord it's important to fully understand your obligations when it comes to tax.
This guide will take you through landlord tax relief following legislative changes over the past five years, ensuring you are clear on your responsibilities.
Landlord tax adviceAs 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 income is hugely important when working out you annual tax bill.
As with anything property-related, it pays to be organised and when it comes to tax, organisation and structure is everything.
Allowable expensesFunctional expenses that fall under the running of your buy-to-let property are deductible from your income before calculating tax.
So things like...
* Utility bills (if you pay them rather than the tenant)
* 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
... are all deductible from your income.
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 propertyPrior to 2015, landlords could claim tax relief on 10% of their property's net annual rent to cover wear and tear.
But those rules changed in 2016 and landlords can now only claim expenses on the actual wear and tear that occurs.
So, if a new carpet is required due to wear and tear, and it costs £800 to purchase and fit, you would be able to claim tax relief on that £800.
Mortgage interest tax reliefSince 2017, landlords have no longer been able to deduct mortgage interest payments from their taxable income.
The changes are currently being phased in and during this current tax year (April 2019-April 2020) landlords can only claim full tax relief on 25% of their mortgage interest payments, with the rest subject to a basic 20% tax credit.
From April 2020, 100% of mortgage interest will be subject to that basic 20% tax credit.
So, 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.
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 dutyFrom 2016, owners of second homes or buy-to-let properties have faced an additional 3% stamp duty charge on top of standard rates.
That leaves the figures as follows:
* £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 taxIf your buy-to-let property has grown in value and is not your main residence, you'll have to pay capital gains tax if you want to sell it in the future.
To work out your 'gain', deduct your purchase price from your sale price and take away any allowable costs, such as agency and conveyancing fees, as well as renovation costs.
Advice on taxation for landlordsThose landlords who remain in the 20% income tax band for their entire income do not need to worry as their tax liability will remain the same despite the changes to relief on mortgage interest currently being phased in.
However, if you fall into that 20% category and want to expand your property portfolio, that increase in income could pull you into the higher 40% tax band - meaning a bigger tax bill once the 20% credit on mortgage interest kicks in fully next year.
Landlords falling into this higher tax bracket or in some cases the top additional rate bracket of 45% could consider placing their buy-to-let property or properties into a limited company structure.
Limited companies are subject to a 19% corporation tax rate (currently), while tax rates on drawing dividends from profit in said company are also lower up to a point.
However, obtaining mortgages on properties held by limited companies can be harder, while drawing larger sums from the profits of the company could push you into a higher dividend taxation band of either 32.5% or 38.1%.
And with obligations to file yearly accounts as well as your self assessment tax return, increased paperwork and some additional costs do come with running a limited company.