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29th January 2020
No one is safe from the taxman and yes, that includes landlords. We all know the infamous Benjamin Franklin saying,
“In this world nothing can be said to be certain, except death and taxes”.
We get a lot of landlords asking us questions about property tax, and so it made sense for us to get a blog about the subject published on the website.
If you’ve got a property tax question, we have probably answered it below as we will cover everything from tax that landlords have to pay to income tax and calculating profits to tax relief.
This content was written and correct on Wednesday 29 January 2020.
There are three key moments when landlords are required to pay taxes, think of it as ‘the property tax lifecycle:
1. When you buy a property
2. Every year you let out the property (as part of your self-assessment tax return)
3. When you decide to sell the property
When renting to tenants, landlords are required to pay tax on any profit that is made from the rental income.
You do have a personal allowance, which is currently set at £12,500 for 2019-2020 tax year, so if profit is below this, you may not need to pay tax but you may need to report the income to HM Revenue & Customs.
HM Revenue & Customs guidance for reporting your rental income is clear.
“You need to declare your rental income to the HMRC before the deadline following the end of the tax year. … You must contact HMRC if your income from property rental is less than £2,500 a year, but you must report it on a self-assessment tax return if it is: £2,500 to £9,999 after allowable expenses.”
See below regarding expenses that may be claimed and what you can do if your rental income has been unreported for several years.
Rental profits are treated the same as receiving income from your business or employment and depends on which tax band the income falls into eg 0%, 20%, 40% or 45%.
Don’t forget that rental income will be added to other income you earn, meaning you could be tipped into the higher tax bracket.
Whilst you can’t avoid paying tax there are ways that you can reduce your rental income tax bill. That’s one of the many perks if you have an accountant, as they will be looking into ways that your bill can be reduced. HM Revenue & Customs has introduced a property allowance of £1,000 which may be claimed instead of your actual expenses but please check with us whether this applicable to your situation.
Below are 8 ways that you can reduce your rental income tax:
Don’t forget about claiming for expenses eg advertisement costs, bank charges, safety certificate costs etc which can reduce your tax bill.
Consider splitting your rent eg put your buy-to-let property into joint ownership and then split the rent between landlords. This is often the most tax efficient way to deal with buy to let properties. There are particular rules as to how you may split the rents depending on the ownership of the underlying asset and whether the joint owner is your spouse. We are happy to advise you of your best options.
Expenses such as utilities or council tax incurred when the property has been empty for a period of time can actually be claimed as a letting expense. HM Revenue & Customs may consider long empty periods of no letting as a cessation of business and also in some cases consideration should be given as to whether expenses are allowable once a property is being sold. We are happy to advise you as to what may be claimed.
Landlords can claim expenses for running a rental business and the associated costs of having an office at home. This is applicable to all landlords, even those who only have one rental property. If however you use a lettings agent to manage your property HM Revenue & Customs may challenge the extent of your involvement and therefore whether the expense is wholly available to you.
If you have a valid claim, you can claim up to £4 a week or £208 without needing evidence of expense deduction.
If you have borrowed money in order to pay for your rental property, don’t forget to claim loan interest paid that relate to financing of the buy to let investments. If part of your repayment is for capital, this element is not allowed as an expense.
This is also applicable if you have borrowed money from friends or family with a loan agreement in place or personal loan.
HMRC has recently changed the way interest relief is given and not all interest paid is now allowed as an expense. Part will be used as an amount to reduce your overall tax bill and care should be taken to ensure you understand the new rules.
If you have never done a tax return, you may have not claimed significant ‘rental losses’ in previous years. These same landlords may now be making significant rental profits which need to be declared with the HMRC.
If you are in this situation, go back and calculate rental loses from these previous years, as these can be carried forward and put against rental profits in subsequent tax years. Losses should be claimed within 4 years of the loss arising but in certain circumstances with a voluntary disclosure of rents, HMRC may consider by concession, periods prior to the 4 years.
If you have received a substantial capital gains bill when selling your buy to let property, landlords who have lived in the property at some time may be entitled to claim additional capital gains reliefs. However, the valuable relief known as Lettings Relief will be ceasing from April 2020. If you share your house with tenants then Rent a Room relief may be an option for you. You may have rental income up to a threshold without paying tax.
Rent a room relief gives an exemption from income tax on profits of up to £7,500 to individuals who let furnished accommodation in their only or main residence.
Try not to be late and get your return in on time to avoid any late penalty fees. Remember that if you have any capital gains on your return, new rules regarding the reporting of the capital gain within 30 days after the date of disposal will be applicable form April 2020. Although the tax and online report will be due within the 30 day window, if you complete a self- assessment tax return the final figures will also be reflected on the tax return.
If you have rental income to report, try and register with HMRC by 5 October following the end of the tax year your rental income arises.
HMRC continues to increase its efforts to target landlords who have undeclared property income and this is one of the reasons this campaign exists.
The Let Property Campaign is an opportunity for those landlords who have undeclared property income and therefore owe tax, to get up to date with their personal tax affairs, in a simply way and also benefit from the best possible terms.
Its best to disclose rental income sooner rather than later. If the HMRC make contact before you disclose income, they have the right to go back up to 20 years and can charge a whooping 100% of any tax due as a penalty should they consider the behaviour deliberate.
100% is a substantial lot more than the 20% that is charged when you have disclosed income, so it’s better to be safe than sorry. Interest is also charged which can add up to a significant figure.
Before changes to mortgage tax relief in 2017, buy to let landlords had the option to deduct any mortgage interest along with other costs before determining taxable profit.
When the government have fully rolled out the new rules (April 2020), landlords will no longer have this option.
A previous blog of ours goes into more detail about these changes to landlord tax relief.
Yes, anyone who buys a second home or a buy to let property is required to pay an additional 3% in Stamp Duty Land Tax.
Rates for stamp duty land tax are as follows:
|Purchase Price||Tax Rate|
|Up to £125,000||3%|
|Over £125,000 and up to £250,000||5%|
|Over £250,000 and up to £925,000||8%|
|Over £925,000 and up to £1.5 million||13%|
|Over £1.5 million||15%|
The Money Advice Service have a handy stamp duty calculator, which is definitely worth checking out.
Calculating profits for your lettings as a single business is fairly straight forward:
Step 1: Total all of your income from all of your properties
Step 2: Total all of your allowable expenses
Step 3: Deduct expenses from the income
Step 4: Enjoy a cup of tea or coffee – you’ve earned it.
If you are making a loss on rental properties, this will need to be deducted from your profit and added to your Self-Assessment form. Remember that losses can be offset against future profits by carrying it over to a later year. If you have more than one rental property, this loss can be offset against these profits too.
If you don’t want to end up facing penalties, we always advise keeping careful records of all rental come and expenses.
That brings us to the end of our property tax for landlords 2020 blog, we hope you have found it valuable and informative. We have not covered the aspect of Furnished Holiday Letting here but we are happy to advise on this if you contact us.
The only last thing we need to add is making sure you complete your tax return on time to avoid any penalties. The paper submission deadline is always 31 October whereas for online the deadline is always the 31 January.
The tax aspects of income from rentals is a detailed one. We have covered many aspects here but the details are not exhaustive. For further information and specific assistance with your situation please do not hesitate to contact us.
If you would like to get in touch you can either call us on 0333 200 0714, or fill in our contact form below and one of the team will be in touch.
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have you read our previous post?