Are you a Landlord? Do you own any rental properties?
Taxation on buy to let properties can be a complex affair so to help those of our clients that are landlords here is a guide that provides basic details as to how buy to let properties are subject to taxation.
Buy to let property is subject to Stamp Duty Land Tax (SDLT). As from 1 April 2016, SDLT is payable as follows:
An investor buying another property that is not their main residence (including holiday homes or buying property on behalf of children if the parents’ names are on the deeds) will be charged of these new rates.
SDLT must be paid within 30 days of completion of the purchase of the property and is usually paid by the solicitor on completion. This tax is deductible from capital gains tax liabilities when the property is sold.
Capital Gains Tax
If the property is sold at a profit, after deducting costs such as estate agents, solicitor’s fees and SDLT, capital gains tax may be due, however owners will benefit from an annual capital gains tax allowance (£11,100 in 2016/17).
Depending upon your income and other capital gains you may have, the rates of capital gains tax are as follows:
The March 2016 budget announced that capital gains tax rates will be reduced to 10% and 20% however these will not apply to landlords and buy to let properties.
Capital gains tax can be reduced by including the following in calculations:
The loss made on the sale of the buy to let property in previous years.
Estate agent fees.
The cost of advertising the property for sale.
Any expenditure on ‘capital’ items (which can be deducted from the capital gain.
If the property was previously your main residence, the gain may be reduced.
Disclosing the Gain
Capital gains tax must be declared on your Self-Assessment tax return and is payable by 31 January in the tax year after which the property was sold (for example, if the property was sold on 6 June 2015, this occurred in the tax year 2015/16 is therefore payable by 31 January 2017).
Any tax due on profit from the sale of a property after April 2019 will become payable within 30 days of the date the property was sold.
All rent is subject to income tax and this needs to be declared on your Self-Assessment tax return. The taxable income is then charged in accordance with your income tax banding (20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate).
Income tax can be reduced by deducting certain ‘allowable expenses’ from the taxable rental income which can include:
Interest on buy to let mortgages and other finance charges (but see below).
Council tax, insurance, ground rent etc.
Property repairs and maintenance (however, large improvements such as extensions will not be income tax deductible and they will be added to the cost of the property when it is sold and be deductible against capital gains tax).
Legal, management and other professional fees such as letting agency fees.
Other property expenses including building insurance premiums.
The 2015 Summer Budget has reduced the amount of tax relief that can be reclaimed on interest on buy to let properties from April 2017.
Prior to April 2017, tax is payable on your net rental income after deducting allowable expenses including mortgage interest. This meant that landlords paying higher or additional rate tax could claim tax relief at their highest rate, however from April 2020, tax relief can only be reclaimed on the basic rate, regardless of whatever tax the landlord pays.
This is being phased in over four years starting from April 2017.
Inheritance Tax (IHT)
Buy to let or second properties form part of your estate for IHT purposes.
If you own the property in your sole name, the value of the property (less any outstanding mortgages) will be included in the value of your estate plan subject to tax at 40% if this is more than £325,000.
If jointly owned, with your spouse or civil partner, the value of the property (less any outstanding mortgages) will be included in the value of your estate plan subject to tax at 40% if this is more than £650,000.
This is a complex area and should be discussed with your accountant, however the following gives a brief summary of the issues.
Limited companies are not affected by the new mortgage interest relief restriction coming into force from April 2017. Interest for limited companies is classed as a business expense and fully deductible against income.
Companies pay corporation tax at a fixed rate, irrespective of the size of profits. The corporation tax rate is currently 20%, reduced to 17% in 2020, which therefore makes the tax rate very attractive compared to 40% of the higher rate taxpayers and 45% for additional higher rate taxpayers.
The big issue is how the money in the company is passed to the individual. If the money is taken out of the company as a dividend, then from April 2016, only the first £5000 dividend income is tax-free. Any dividends taken in excess of this will either be charged at 7.5% for a basic rate taxpayer, 32.5% for higher rate taxpayers or 38.1% for additional taxpayers. This tax is after corporation tax at 20% has been paid.
Money could be taken out as a salary but the company would have to operate Pay As You Earn and pay employers national insurance contributions on any salaries paid. This usually works out more expensive than paying dividends.
Taking an income from a limited company that has been generated by rent could be more expensive than holding the property as an individual.
You should also be aware that if you transfer property that has been owned by an individual to a limited company, SDLT will be payable.
The taxation of buy to let and second properties is becoming more complex. If you require any support, please do not hesitate to contact us on 01661 860438.