Owning a property and renting it out for a living can be a difficult business to get right. You need to balance your tenants' happiness with profit – and now HMRC are changing landlord tax laws. Keeping up with these new changes could be the difference between just staying afloat or thriving.
Here is The Financial Management Centre’s ultimate guide to the new landlord taxes.
Please note, the following tax rates apply to landlords in England and Wales, as rates may differ in Scotland.
Landlord taxes – Stamp Duty Land Tax
In addition to the usual stamp duty applied when you purchase a property, landlords and second home owners are also required to pay an extra 3% "landlord tax" upfront.
The way stamp duty is calculated depends on the value of the property you’re buying. The current rates are as follows:
Buy-to-let and second home Stamp Duty tax bands
Buy-to-let/second home rate (1st April 2016)
Up to £125,000
£125,001 – £250,000
£250,001 – £925,000
£925,001 – £1.5m
Say you bought a buy to let property for £350,000. You would pay stamp duty at 3% on the first £125,000 of the cost, 5% on the £125,001 to £250,000, then 8% on the remainder of the cost over £250,001.
So how would this calculation look?
£125,000 x 0.03 = £3,750
£250,000 – £125,000 x 0.05 = £6,250
£100,000 x 0.08 = £8,000
Total = £18,000 stamp duty payable.
Landlord taxes – Income tax
You will need to pay income tax on any rental income you make from all properties you own.
Once you start letting a property, you’ll need to inform HM Revenue and Customs. If you don’t pay the income tax you owe, you could be charged hefty penalty fees, so it is always wise to contact HMRC as soon as possible.
The amount of income tax you pay will depend on your total taxable income. As a basic-rate taxpayer then you will pay 20% whereas a higher-rate taxpayer would pay 40% and an additional-rate taxpayer would pay 45%.
Landlord taxes – Allowable expenses
In some cases, you may be able to offset any costs that are deemed to be essential to your duties as a landlord against your rental income to reduce your income tax bill.
These allowable expenses are things you need to spend money on as part of the day-to-day running of your property,,such as:
- Rent, ground rent and service charges;
- Council tax bills;
- Utility bills;
- Letting agents’ fees;
- Accountants’ fees ;
- Buildings and contents insurance;
- Interest on any property loans you may have taken out;
- Money spent on maintenance and repairs (but not home improvements)
- Any services you pay for, such as cleaning and gardening
- Any other direct costs incurred, such as phone calls, advertising or stationery
Whilst you cannot claim back on the total cost of the mortgage for your rental property, you can save money when it comes to the interest on your repayments.
Before April 2016, you would have been able to deduct 100% of your mortgage interest from your profits to reduce your tax bill, however the rates have since changed. Here is how much mortgage interest you can deduct now:
Mortgage interest deductible under the old scheme
Mortgage interest you must pay to gain the 20% tax credit
If you let out a furnished property, you can also claim 10% of the net rent as part of the ‘wear and tear allowance’.
Landlord taxes – Capital gains tax
When you come to sell your rental property, you will be liable to pay Capital Gains Tax (CGT) if the property has increased in value under your ownership.
The calculation is reasonably simple; you’ll just need to deduct the price you bought the property for from the total amount you’re selling it for. You can also deduct a number of costs such as agents’ and solicitors’ fees and any renovations costs to reduce the CGT you pay.
You can work out the amount of CGT you’ll need to pay by using an online calculator.
We can help
Whether you are looking to start out as a landlord, or you’re a well-established owner, let us keep your books balanced.
All of these changing tax laws make it easy to get muddled up on your returns, meaning you might be overpaying HMRC – or even worse, underpaying them.
Call our team today on 0800 470 4820 OR 0333 202 7198