Being a landlord can be rewarding, but it is a challenging process. Landlords have considerable responsibilities, in pleasing tenants, in maintaining the property, and in administrative roles. Taxation is a critical area for landlords to consider, and this landlord tax guide aims to simplify the process for landlords.
The primary forms of tax landlords must focus on are:
- Stamp Duty Land Tax
- Capital Gains Tax
- Income Tax
Stamp Duty Land Tax
Stamp duty is paid when purchasing a property. If you are selling a house you already own or which you have inherited, you don’t need to worry about stamp duty. However, if you are buying to let, stamp duty land tax is a crucial element to consider at the start of the letting process.
If you are buying a second (or additional) property in England or Northern Ireland, you pay an additional 3% stamp duty as a surcharge.
- For a property valued up to £125,000, you pay 3% stamp duty
- For a property valued between £125,001 and £250,000, you pay 5% stamp duty
- For a property valued between £250,001 and £925,000, you pay 8% stamp duty
- For a property valued between £925,000 and £1,500,000, you pay 13% stamp duty
- For a property valued at £1,500,001 or above, you pay 15% stamp duty
Capital Gains Tax
Capital Gains Tax is relevant if you sell the property.
If you don’t sell your buy to let property, you don’t need to worry about Capital Gains Tax; it is only relevant if you sell the rental property. Capital Gains Tax is payable on the profit you make when selling property, and your taxable threshold.
Income Tax is an ongoing tax, based on income landlords receive when letting property.
The basis for income tax as a landlord is the rental income you receive from your tenants. Rental income is considered in the same manner as any other monthly earnings.
By becoming a landlord, you’re setting up an ongoing financial source – the rental income you receive from tenants. You pay tax on rental income like any other monthly earnings.
Landlords are taxed on net rental income, the profit that is made by a landlord. To calculate your net rental income, you add together all rental income and then subtract any income tax allowances, relief or allowable expenses.
Income Tax Rates
The income you earn determines your income tax band, and this determined your rate of tax for a particular year. When reviewing rental income for income tax purposes, the rates and thresholds in place are the same as for personal income. Of course, if you earn rental income in addition to income from other sources, you must work out your total revenue for the year.
- In 2019/20, the personal allowance is £12,500. If your income is below or at this level, you pay 0% tax on income.
- For 2019/20, the basic rate of tax is between £12,501 and £50,000. If your income is in this band, you pay 20% in tax on income.
- For 2019/20, the higher rate of tax is between £50,001 and £150,000. If your income is in this band, you pay 40% in tax on income.
- For 2019/20, the additional rate of tax is £150,001 and above. If your income is in this band, you pay 45% in tax on income.
If you earn less than £1,000 a year in rental income, you don’t need to report this to the HMRC. If you earn between £1,000 and £2,500 a year in rental income, you need to contact HMRC. If you earn between £2,500 and £9,999 (after allowable expenses), or more than £10,000 (before allowable costs), you must register with HMRC, and complete a tax return which includes your rental income.
Landlord Tax Returns
When people are due to pay income tax on income from sources other than a salary, HMRC expects them to complete a self-assessment tax return. Landlords who receive rental income and are due to pay tax must complete a self-assessment tax return.
The tax year runs from 6th April to 5th April, and a self-assessment tax return must be undertaken every year. HMRC decides how much tax a landlord should pay based on these figures. Landlords should retain receipts for all work undertaken at their property, allowing them to claim expenses.
A landlord can complete a tax return in two ways:
- You complete the tax return yourself
- You employ an accountant to sell-assess on your behalf
There are reasons for selecting either option. When you complete the tax return yourself, you save money by not hiring a professional. However, if you employ an accountant, you have more time to focus on other tasks, and you reduce the likelihood of making mistakes. Not everyone knows to file rental income or accurately complete a tax form. If you are in any doubt as to how to complete the form, please speak with a professional.
Deductible Expenses on Rental Income
To reduce the amount of tax, you must pay, be aware of deductible expenses on rental income. The following expenses qualify as deductible expenses:
- Mortgage interest payments
- General maintenance and necessary repairs
- Replacing some domestic items
- Letting agent fees and management fees
- Accountants fees, if applicable
- Electricity, gas, council tax and water rates
- When the let is for a year or less, legal fees
- When you are renewing a lease for less than 50 years, legal fees
- Vehicle running costs for your business
- Direct costs such as advertisements, stationery or business calls
Aspects which don’t qualify as deductible expenses include the full mortgage payment, home improvements, non-business calls, clothing or personal expenses.
Landlords only pay council tax on the rental property when their rental property is unoccupied. The tenant is responsible for council tax, but if they leave, the responsibility shifts to the landlord. If you pay council tax on the rental property, you can claim it as an expense in your self-assessment tax return.
Being a landlord is challenging, but with support and guidance, you can manage your rental property, tenants and business affairs. It is understandable some landlords have concerns about tax, but hopefully this guide leaves you feeling more confident about the process. If you would like to discuss taxes for landlords, please contact us today.