Navigating the world of tax can be tricky when you are a landlord as there’s a lot to think about and consider. There’s no doubt about it – it can get pretty complicated and that Self Assessment tax return form can seem rather daunting. However, fear not; legislation around tax is always changing, but we are on hand to break a few things down and make the current situation a little simpler.
Firstly, you must let HM Revenue and Customs know when you start renting out your property as you may have t o pay income tax. Avoiding this is not a good idea as you could be charged a penalty!
The basics of income tax
The amount of tax that you are required to pay depends on your total taxable income, including any profit you make on renting out your property. This also includes any other income you earn, for instance from your full time job. The most basic rate of tax that you can pay is 20%, which applies to people with an income of over £11,001. If your income is over £43,001 it rises to 40% and finally 45% for people with an income over £150,000.
You can deduct any allowable expenses from your income that can be exempt from tax. Allowable expenses are things you need to spend money on to ensure the smooth day-to-day running of your property and perform your duties as a landlord. These include things like letting agents’ fees, legal fees for lets of a year of less, or for renewing a lease for less than 50 years, accountants’ fees, buildings and contents insurance, interest on property loans, maintenance and repairs to the property (but not improvements), utility bills such as gas, water and electricity, rent, Council Tax, services such as cleaning or gardening and other direct costs of letting the property such as phone calls, stationary and advertising.
If you rent out a furnished property, you may also be able to claim tax relief on money spent replacing domestic items, such as beds, sofas, curtains, carpets and fridges. Of course, the item must only be used to replace an old item for the tenant’s use in the property, and the old item must no longer be used.
All of these things are referred to as revenue expenses and are not to be confused with capital expenses, which are expenses that will increase the value of the property such as renovating it beyond general wear and tear. You cannot deduct capital expenses from your tax bill as they are not particularly necessary in the general running of the property.
Different types of tax
If being a landlord is your primary job, you let more than one property or you acquire properties with the intention of renting them out, you may also be required to pay Class 2 National Insurance tax. This only applies if your profits are over £5,965 a year. If they are less than this, you have the option of making voluntary National Insurance payments which are beneficial as they can contribute towards you being entitled for the full state pension.
Then there’s Stamp Duty Land Tax, which occurs when you purchase a second home or a buy-to-let investment. If you are in England, you are required to pay between 3% and 15% Stamp Duty Land Tax, depending on your purchase price. This can be easily worked out using a stamp duty calculator.
Capital Gains Tax is the other one you’ll need to keep in mind, particularly when you sell your property. You pay this if your rental property has increased in value for any reason. It’s pretty simple to work out your gain – simply deduct the price you bought the property for from the total that you are selling it for and use a Capital Gains Tax calculator to work out how much you will be required to pay.
Profit & loss
Calculating your net profit as a single letting business could not be easier. All you need to do is total all of your rental income from all of your properties, add up your allowable expenses, and then take away the expenses from the income.
If it turns out that you are making a loss on your rental properties for any reason, then you will need to deduct these losses from your profits and input this on your Self Assessment form. Your losses can be offset against your future profits by carrying over to a later year, or against profits from other properties in your property portfolio. For example, if one year you received rental income of £10,000 but claimed expenses worth £12,000, that would be a £2,000 loss for the year. If you went on to make rental profits of £3,000 the next year, you could deduct your previous £2,000 so that you would only owe tax on rental profits of £1,000.
If you have unpaid tax from previous years, declare it! Let HMRC know because if you do incur a penalty, it will be lower if you declare it as oppose to HMRC finding out about it themselves.
It pays to be meticulous and honest when it comes to tax. The rules are always changing and it’s important to keep up to date and seek professional advice on any grey areas. Remember – tax doesn’t have to be taxing!