Landlord tax guide - updated for 2019/20

*Please note the information in this article may be out of date

Our detailed Landlord Tax Guide, where our property tax experts tell you what you can claim in expenses along with a comprehensive insight into HMRC tax rules and recent changes.

There have been many changes in property tax over the last few years, and it is important to understand how these affect you, and then use this knowledge to plot the best way forward.  With such regular changes, it is important to learn, change and adapt to these.

There is little doubt that, in the UK, investment in property has a unique physical appeal that cannot be matched by investing in the stock market and ISAs. The private rental sector has more than doubled since 2001 and this trend is predicted to continue with more than half of 20-39 year olds expected to be renting privately by 2025.

Into this breach has stepped a growing army of buy-to-let Landlords. Studies suggest, however, that more than 1 in 3 landlords do not understand their taxation obligations. With HMRC targeting those landlords who have never declared their rental profit and the UK Government clamping down on property as an investment in an attempt to control the housing market, the need for increased awareness by buy-to-let landlords of their tax position has never been greater.  On this subject, you may wish to view our feature which explains HMRC’s Let Property Campaign in depth, which is the new department set up to claw back this unpaid tax.

This landlord tax guide is designed for both those taking their first steps on the path towards becoming a landlord and those looking for guidance in managing their portfolio. Whether you're an accidental landlord who has inherited a property, purchased a new investment property or even let your previous home to tenants, you must consider your tax implications and understand how these are reported to HMRC.

As a buy-to-let landlord, you may face several taxes, regardless of whether you own a single property or 100 properties. This landlord tax guide will discuss each in turn. There are four main types of tax that your investment in buy-to-let will incur. These are

• Stamp Duty Land Tax
• Income Tax
• Capital Gains Tax
• Inheritance Tax
• Corporation Tax (if you operate via a limited company)

Stamp Duty Land Tax (SDLT)

Stamp Duty Land Tax (SDLT) is a tax you pay when you buy any property in the UK.  So, if you own your rental property already, this won’t apply to you. If you are purchasing a rental property however, this can be a very large and sometimes unexpected expense that you should factor into your buying calculations.  Stamp Duty rates are set in tiers, depending on the price of the property. The rates for BTL purchases are as follows:

Stamp Duty             Property Value

     3%                         On the first £125,000

     5%                         £125,001 - £250,000

     8%                         £250,001 - £925,000

   13%                        £925,001 - £1,500,000

   15%                        £1,500,000 +

By way of example, if you were to purchase a BTL property for £350,000 then stamp duty would be calculated as follows:

3% on the first £125,000 = £3,750

5% on the amount from £125,001 to £250,000 = £6,250

8% on the next £100,000 = £8,000

Total = £18,000

However, there are some exceptions, such as if your property costs less than £40,000, or if you are purchasing a mobile home or a caravan. Otherwise that’s a hefty chunk out of your purchasing budget. Stamp Duty is a capital cost, and so isn’t a deductible expense against your rental profit. It can however be utilised when you sell the property to reduce your capital gains tax liability.

In Scotland and Wales, the principles of stamp duty remain however the rates and exemptions are different. More information can be found here:

Scotland – Land and Buildings Transaction Tax (LBTT)

https://www.revenue.scot/land-buildings-transaction-tax

Wales – Land Transaction Tax (LTT)

https://gov.wales/funding/fiscal-reform/welsh-taxes/land-transaction-tax/?lang=en

Income Tax

Profits you receive from renting your property are taxable and must be declared to HMRC. This is usually done via a Self-Assessment tax return. There may be exceptions to this, such as if your profit is less than £2,500, however, you do still need to inform HMRC.

The profit from your rental income is added to all other sources of income, and that total determines which tax band you fall in to - 20% for basic rate taxpayers, 40% for higher rate, and 45% for additional rate. It’s also worth noting that if you live in Scotland, you may pay a slightly different rate of tax to the rest of the UK.

Landlords may deduct "allowable expenses" from their rental income, which results in their profit, and it is this profit which is exposed to income tax. Allowable expenses are those costs deemed to be essential to you performing your duties as a landlord. Allowable expenses are things you need to spend money on as part of the day to day running of your property business. These include:

• letting agents’ fees
• legal fees associated with renewing a lease or evicting a tenant
• accountants’ fees
• buildings and contents insurance
• maintenance and repairs (but not improvements)
• utility bills like gas, electricity and water
• ground rent and service charges
• council tax bills (when unoccupied or if you pay)
• professional subscriptions and membership of a Landlord Association
• stationery and postage
• any services you pay for, such as cleaning and gardening
• any other direct costs of letting e.g. phone calls, advertising or visits to the property

Other claimable expenses include Landlord Insurance, expenses related to landlord regulations, including Gas Safety Certificates/checks, EPC’s, Smoke & Carbon Monoxide Alarms etc., landlord and accounting software, tools and materials required to assist with maintenance & repairs and the repairing or replacement of furniture and white goods.

Costs that ARE NOT allowable expenses include:

 The full amount of your mortgage payment – up until April 2020 only a percentage (depending on the year) of the interest element of your mortgage payment can be offset against your income (more on this later)

Personal expenses - you can’t claim for any expense that wasn’t incurred solely for your rental business; for example, if you buy a vacuum cleaner for your home and use it on a property occasionally, this would not be an allowable expense.

Looking at the above list of allowable expenses, you may by now have noticed that interest on mortgages wasn’t included. Since 6^th April 2017, landlords have been unable to fully offset the interest from any loan, including mortgages, overdrafts and loans to buy furnishings. This relief is being replaced by a standard 20% tax credit. This restriction only affects those landlords paying higher (40%) or additional (45%) rate tax, although it can also affect landlords who were previously basic rate taxpayers under the old rules, but the new rules push them into the higher tax bracket. These landlords could previously claim tax relief at their highest rate, but the Budget changes mean that tax relief will only be reclaimed at the basic rate (20%), whatever rate of tax the landlord pays.

The restriction is being phased in gradually and will be fully in place for the 2020-21 tax year as follows:

2017/2018 – Tax relief available on 75% of mortgage interest

2018/2019 – Tax relief available on 50% of mortgage interest

2019/2020 – Tax relief available on 25% of mortgage interest

2020/2021 – Only restricted relief available

This change will mostly affect landlords with large mortgage debt, but if you pay at 40% or 45% you'll be losing out. If you're a landlord who only pays basic rate tax, this change may not affect you immediately though, if you are close to the higher rate tax threshold, the full rental income will be added to your other income, meaning you may become a higher-rate tax payer as a consequence.

It is worth making clear that under the new rules, those landlords incurring finance costs and mortgage interest will have an inflated profit.  This means it could affect other claims, such as child benefit and tax credits.

A big change also occurred in April 2016.  This was when HMRC no longer allowed landlords to claim for "wear and tear" allowance. Previously, a landlord could claim 10% of their net rent as tax relief for wear and tear, even when there was little or no expenditure, on fully furnished properties. This allowance has been replaced by a relief that only allows landlords to claim tax relief when they replace furnishings. This relief applies to landlords of all unfurnished, part-furnished and fully furnished properties and includes movable furniture or furnishings, such as beds or suites, white goods, carpets and floor-coverings, etc. Note that this applies to replacement furniture only, not to initially furnishing a property before letting.

The allowance of expenses can be a minefield, so if you're at all unsure, property tax advisers, such as ourselves, can help you to make the most of your allowable expenses so that you don't pay more tax than you have to, whilst standing up to HMRC’s scrutiny.

Capital Gains Tax

If a landlord sells a property which has increased in value, then they may be liable to Capital Gains Tax (CGT). Working out the gain you've made on the property is reasonably straightforward. You deduct the price you bought the property for from the total you’ve sold it for. You can deduct costs such as agents' or solicitors' fees and the costs of improvements. Capital gains tax is then payable on the profit. If you have made a loss, then of course, no tax is payable.

Further to the above, however, you get an annual tax-free allowance of capital gains that you can make each tax year before CGT is charged. You then only pay CGT on your overall gain above your tax-free allowance (called the Annual Exempt Amount). This is £12,000 for the 2019-20 tax year. If you own the property jointly, you each benefit from this allowance.  If you've sold a buy-to-let property, you'll need to declare this on your Self-Assessment tax return. Capital gains tax is charged at 18% or 28% of the profit (depending on your taxable income and total capital gains you've made over the year).  It is worth pointing out that the date of exchange is the tax “point.”  So, if you exchanged on 5^th April, and completed on 12^th April, then the Capital Gains Tax would be due much earlier than if you exchange on 6^th April and completed on 12^th April!

What happens if you make a loss on sale?  This can be registered with HMRC and carried forward for future use. So, all is not lost.

If you have lived in the property as your main residence, then you would be entitled to private residence relief for the time you have lived in the property as your main home. If you qualify for Private Residence Relief and have a chargeable gain, you may also qualify for Letting Relief. Lettings relief increases the amount of the gain that is sheltered from CGT. This means you'll pay less or no tax. This can be a very valuable relief for private landlords.  However, please refer to our recent feature regarding the changes to Private Residence Relief and Lettings Relief, as there are big changes being proposed for April 2020 onwards.

Inheritance Tax

It’s not something anyone likes thinking about.  Inheritance tax (IHT) is a tax on everything you leave in your estate when you die. While we may not wish to think about it, your buy-to-let properties (or property) form part of that estate for inheritance tax purposes and you may wish to consider an Inheritance Tax planning strategy to lower the tax liability for your loved ones. You may need to pay inheritance tax on buy-to-let properties if the total value of your estate exceeds £325,000 (or up to £650,000 for married couples or civil partners). Inheritance tax is charged at 40% on everything above this threshold (other than on estates passing to the spouse or civil partner, which are exempt).

However, you may qualify for Business Relief if your buy-to-let portfolio was run as a business. However, this is a detailed and complex area, and this will depend on a number of factors. A good tax accountant, such as ourselves, can discuss this with you and you may be able to help you reduce your exposure to inheritance tax.

Corporation Tax - using a Limited Company to pay less tax

Section 24 and the restriction of mortgage interest and finance costs has been the hot topic of recent years.  An equally hot topic has been whether landlords should start operating via a limited company.  Since limited companies are not affected by the reduction in tax relief for mortgage interest, an increasing amount of buy-to-let landlords are considering this option. It is however a very complex area of property taxation and you should always seek advice before forming a buy-to-let limited company.

The problem however, is how you transfer your existing property into a limited company, without being hit with stamp duty and capital gains tax.  Some landlords have been able to get around this by using a famous tax case (the Ramsey case), and benefit from incorporation relief.  This is a highly complex area, and the text on this is vast.  However, they ran this as a property “business” and the services they provided were well over and above those that most landlords provide.  We  discuss this case in further detail in our buy-to-let incorporation blog.

Given most landlords will have difficulty applying the above case to their own circumstances, what we see most often here at RITA4Rent [Insert tracked link], is landlords keeping their existing property held individually, but consider making NEW purchases within a newly formed limited company.

There are certainly many attractions to a limited company, but there are disadvantages too.  You may wish to refer to our feature that explores these in greater detail, titled: “How can I avoid paying tax on my rental income?”

We do hope you found this feature helpful.  There is no one size fits all approach and, while this landlord tax guide is a good starting point, specialist tax advice from property specialists such as ourselves [Insert tracked link], is highly recommended.