Landlords: The Basics of Tax Liabilities
As the landlord of a rental property there are a number of taxes that have to be paid to HMRC due to rent being classed as an income. In this article we explain the basics of what you need to know about tax liabilities.
Income has to be declared using a self-assessment tax form which is sent directly to HMRC.
There are some allowances allowed which will lower the amount you need to pay, such as a personal allowance, which is £12,500 for 2020/21. This increases for anyone who earns more than £100,000 (including any other income).
You may also be able to claim a property allowance which sees the first £1,000 of rental income remain untaxed. Once your total income – including rent received – is calculated, you are then taxed at your personal tax band.
Landlords are also able to claim tax relief on mortgage interest to further reduce the amount you pay.
When calculating your tax bill, mortgage payments can no longer be deducted from your rental income, with a recent change in law meaning rental income is now taxed, while you receive a 20% tax credit for the mortgage interest.
Other ways to lower your tax bill are linked to things like council tax, insurance and utility bills, while tax breaks may be available if fixtures or fittings have been replaced in the property.
Leasehold properties can also offset ground rent and service charges, giving you another way to further reduce tax commitments.
Recent changes to the law now mean that anyone who buys an additional residential property for £40,000 or more has to pay a 3% Stamp Duty Land Tax (SDLT) surcharge. This also applies to buy-to-let properties.
While a stamp duty holiday remains in place until 31st March 2021, the 3% rate will be applied in addition to new tax rates, which will mean paying tax on the first £500,000 of the property.
Capital gains could also be payable on profits made from rent income on properties not classed as your main home. This means paying tax on any rise in value seen on the property since you became the owner.
For the tax year 2020/21, the capital gains allowance stands at £12,300, which is the amount of profit you can receive before any tax is applied. Basic-rate taxpayers are taxed at 18%, while higher-rate taxpayers are taxed at 28%.
As long as you retain proof of any major expenditure spent on the property during your time of ownership, you may be able to reduce your capital gains tax liabilities. Stamp duty costs paid when buying the property could also be offset against your capital gains tax bill.
Our break down of landlord tax liabilities shows how important it is to calculate your profits before investing in a buy-to-let property, as without taking tax into account you run the risk of setting unrealistic expectations.
There may be a limit to what you can accurately calculate without using a professional accountant, and while it is an added expense, using their valuable tax expertise will probably save you a lot more money in the long run.