If you're earning an income from renting property, make sure you’re aware of your tax liabilities. Here's an overview of what you need to know.
If you’re a landlord who receives rent from a property, this is considered an income for tax purposes.
It’s important that you understand the tax implications of bricks and mortar investments, to avoid falling foul of HMRC.
Here’s a round up.
Rental income you receive will be added to any other income for tax purposes, such as employment income or savings.
You’ll need to declare rental income on a Self Assessment tax return each year, but there are certain allowances you have which reduce the amount you shell out to the taxman.
For starters, you have a Personal Allowance, which is the amount you can earn, and includes rental income, before being subject to tax. This stands at £11,850 for the 2018/19 tax year.
After that’s taken into consideration, any rent you receive will be taxed at your personal tax band. Beware that chunks of rental income could potentially push you into a higher band, seeing you pay more tax than you expected.
But there are allowances that reduce the amount of tax landlords pay on rental income, although these have been whittled away over recent years.
You used to able to claim tax relief on mortgage interest as a landlord. Since April 2017, a reduction in the value of this is being phased in – set to reach the basic rate for all landlords by April 2020. This will take a bite out of the profits for higher (40%) and additional rate (45%) taxpayers in particular.
The 10% wear and tear allowance was scrapped in April 2016. Landlords renting furnished properties are now only able to claim for the costs of any repairs or damage that they face paying out for.
However, there are plenty of other costs you can offset against your rental income to reduce your tax bill. For example, these include letting agent fees, buildings and contents insurance, council tax and utility bills.
If you’re renting out a leasehold property, you can also offset service charges, and ground rent.
Capital gains tax
If you’re selling a property that isn’t your main home, you may be subject to Capital Gains Tax on any profits – or, in other words, the rise in value over the time you’ve owned it.
Everyone has a CGT allowance, which is the amount of profits you can make on investments before being subject to this tax. This stands at £11,700 for the 2018-19 tax yea. After which, CGT is payable at 18% or 28%, depending on your personal tax bracket.
But you may be able to reduce the amount of CGT you pay for major capital expenses you’ve forked out for during the period of ownership, such as replacing windows.
Make sure to keep proof of any large costs to maintain the property as the owner. You can also offset Stamp Duty costs you originally paid when buying the property against your CGT bill.
CGT is currently payable within 18 months of completing a purchase, but this timeframe will fall to just one month from April 2019 onwards.
Landlords may face paying eye-watering sums for Stamp Duty since the introduction of the 3% loading on ‘additional homes’, which includes buy-to-let properties.
This new Stamp Duty band was introduced on 1 April 2016, and it’s charged on the entire property price. So, for example, that’s £10,500 on a £350,000 property.
While returns from buy-to-let can be enticing, make sure to do your sums first – tax can take a big chunk out of profits. And it’s important to understand the tax changes to buy-to-let investments over recent years.
If you’re unsure of your tax liabilities, make sure to seek professional advice. An accountant should be able to clarify what your liabilities are, when these should be paid, and any allowances you may have to slash your bill.