Watch out for the landlord tax traps that could ensnare you and your buy-to-let property
06-07-2015
By Melanie Wright For The Daily Mail
Stay tax savvy: Being a landlord can be extremely financially rewarding, but don't forget that the taxman will always want his share
Being a landlord can be extremely financially rewarding, but don't forget that the taxman will always want his share.
You'll not only have to pay stamp duty when you purchase a buy-to-let property, but there is also tax to pay on the rental income you receive, and on any gains you make when you sell up.
Here's our rundown of all the taxes every buy-to-let investor needs to know about.
Stamp duty
The stamp duty system was reformed in December last year, so that rather than being a flat percentage of the whole property price, you pay different rates for different bands of the purchase price, in a similar way to income tax.
So, for example, you won't pay any stamp duty (or stamp duty land tax, as it is properly known) on the first £125,000 of the purchase price, but you'll pay 2 per cent on the amount between £125,001 and £250,000.
If you are buying a £200,000 property to let out, for example, you'll pay £1,500 in stamp duty.
If your property costs more than £250,000, you'll pay 5 per cent stamp duty on the amount of the purchase price between £250,001 and £925,000, then 10 per cent on the amount between £925,000 and £1.5 million.
You'll pay 12 per cent on everything above £1.5 million.
The good news is that when you come to sell your buy-to-let property, you can offset the stamp duty you paid against your overall gain in order to reduce your capital gains tax bill.
Any income you receive as a buy-to-let landlord is taxable. You must declare this rent on a self-assessment tax return.
The amount of tax you'll pay depends on your income tax band, so you'll pay 20 per cent if you're a basic rate taxpayer, 40 per cent if you're a higher rate taxpayer and 45 per cent if you pay tax at the additional rate.
There are several perfectly legal ways to reduce the amount of tax that you pay on buy-to-let income.
For example, you can offset your mortgage interest as an expense against your rental income. You cannot, however, claim tax relief on capital repayments.
You can also deduct letting agency fees, buildings and contents insurance premiums, and utility bills (provided you, rather than your tenant, pay these bills).
Robert Pullen, of accountants Blick Rothenberg, says: 'In addition, any repairs or redecoration works are allowable, such as painting or fixing a leaking roof.'
If you are letting out a property with furnishings included, you can also claim 10 per cent of your net rent as a 'wear and tear allowance'. The net rent is the rent you receive, minus any costs the tenant pays, such as council tax.
Mr Pullen adds: 'Costs incurred replacing furniture or free-standing white goods such as a fridge freezer are no longer allowable for tax purposes. However, replacing a broken boiler or a part of a fixture, such as a kitchen unit, would be OK.'
Capital gains tax
If you've made a profit when you sell your buy-to-let property, you will have to pay capital gains tax (CGT) if this profit is bigger than the CGT annual allowance — which is £11,100 in 2015 to 2016.
CGT is charged at 18 per cent if you're a basic rate taxpayer or 28 per cent if you're a higher rate taxpayer.
Chris Springett, associate tax director at Smith & Williamson, an accountancy and investment management group, says: 'In order to calculate the CGT position, the seller deducts the original cost of the property from the proceeds received on sale.
'Further costs, including those incurred in enhancing the property, such as adding a conservatory, a loft conversion or an extension, can also be deducted from the sale price to work out the capital gain.'
You can also subtract any losses in the same financial year on other investments you may have, as well as any unused losses from previous years. Mr Springett says: 'There is no restriction on the amount of losses that can be claimed, nor on their source.
'For example, you can offset losses on the sale of equities against a gain on a buy-to-let property. After deducting the annual CGT exemption of £11,100, as well as certain costs and any losses, tax is applied to the remaining gain.'
If you have previously lived in the property that you now let out, you may also qualify for a tax break called 'principal private residence relief'.
This means you get tax relief for the whole time it was your main home, and for the last 18 months you owned the property.
In simple terms, you can deduct any rise in the value of the property during the years you actually lived in it from your calculated gain.
You must declare any CGT you need to pay on your tax return.
Mr Springett says: 'The tax return and the tax are due on January 31 following the end of the tax year in which the property is sold.
'So if you were to sell your property in June 2015, for example, the tax would not be due until January 31, 2017.'
Inheritance tax
When you die, any buy-to-let properties you own will be included in your estate.
If your whole estate is worth more than £325,000 — or £650,000 for married couples or civil partners — then inheritance tax (IHT) is charged at 40 per cent on everything above this threshold.
Accountant Robert Pullen says: 'It may be worth considering taking out life insurance to cover the resulting IHT bill, which will pay out to the nominated beneficiaries.'
If you take this route, make sure that your life insurance policy is written in trust.
A trust is a legal arrangement which will ensure that any payment on death is outside your estate for IHT purposes.