Buy To Let Updated:
For many, property has a unique physical appeal that shares and investment funds just can't match. But the Government has been clamping down on this form of investment as it looks to control the housing market. The tax position of buy-to-let investing is therefore changing.
But buy-to-let (BTL) is subject to several taxes, whether you own a single property or 100.
There are four taxes that your investment in a BTL property will possibly incur:
Capital Gains Tax
Stamp duty is a tax you pay when you buy a property in the UK. It's set in tiers, depending on the price of the property. From April 2016 Stamp Duty rates have increased by 3% at each tier to the following:
£0 - £125,000
£125,001 - £250,000
£250,001 - £925,000
£925,001 - £1,500,000
If you bought a property for £300,000 you'd pay the following stamp duty:
This comes to a total of £13,999.95.
"Stamp duty is a one-off tax. That means that if you decide to rent out your home (because you can't sell it or you're moving in with a partner), you wouldn't have to pay it again as a buy-to-let landlord on the same property."
The income you receive as rent is taxable. You need to declare any rent you receive as part of your Self Assessment tax return. The tax on your income is then charged in accordance with your income tax banding (20% for basic rate taxpayers, 40% for higher rate, and 45% for additional rate).
However, you can minimise the tax you have to pay by deducting certain "allowable expenses" from your taxable rental income. Allowable expenses include:
The Summer Budget 2015 has introduced changes to the amount of tax relief that is available for interest on buy-to-let mortgages. Landlords paying higher (40%) or additional (45%) rate tax could claim tax relief at their highest rate, but the Budget changes mean that tax relief will only be reclaimed at the basic rate (20%), whatever rate of tax the landlord pays.
So, if you're a landlord who only pays basic rate tax, this change won't affect you, but if you pay at 40% or 45%, you'll be losing out. These rules start to apply in the 2017/2018 tax year when the relief currently available will reduce by 25%. The available tax relief will reduce over the subsequent three tax years and will be fully in place by 2020/2021.
Another change from April 2016 is the removal of the "wear and tear" allowance. Previously, a landlord could claim 10% of their rent as tax relief for wear and tear, but this is no longer the case. Instead, the allowance is being be replaced by a system that only allows landlords to claim tax relief when they replace furnishings.
If you're in any way unsure, an accountant can help you make the most of your allowable deductions so that you don't pay more tax than you have to.
One peculiar thing about rental income is that it doesn't qualify as income for pensions purposes. So if all your income is from renting property, you would not benefit from tax relief on your pension contributions as you can with most income. Income from a furnished holiday let, however, does qualify!
HM Revenue and Customs requires you to keep a record of your income and expenses as a buy-to-let landlord for at least six years.
Capital gains tax is payable when you sell a buy-to-let property at a profit from when you bought it. It isn't payable if you make a loss.
You get an annual tax-free allowance of capital gains that you can make each tax year before capital gains tax is charged. This allowance for tax year 2016/17 is £11,100.
If you've sold a buy-to-let property, you'll need to declare this on your tax return. Capital gains tax is charged at 18% or 28% of the profit (depending on the taxable income and total capital gains you've made over the year). Again, a furnished holiday let may attract a lower 10% rate of CGT due to 'Entrepreneurs Relief', which applies to selling certain businesses.
If you've made a loss on a buy-to-let property sold in a previous year, you may be able to use this loss to reduce your capital gains bill. Similarly, you are able to deduct some expenses you've incurred in buying, selling or improving the property:
This isn't nice to think about, but very important to plan for. Your buy-to-let properties (or property) form part of your estate for inheritance tax purposes.
If an individual's estate exceeds £325,000 (or up to £650,000 for married couples or civil partners), inheritance tax is charged at 40% on everything above this threshold (other than on estates passing to the spouse or civil partner, which are free of inheritance tax).
You may qualify for Business Relief if your buy-to-let portfolio was run as a business. This will depend on a number of factors.
A good accountant may be able to help you reduce your exposure to inheritance tax.
Compare the best buy-to-let mortgages
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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.
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