UK property tax for landlords
If you’re a buy-to-let landlord or landlady you will need to be aware of your obligations and rights when it comes to property tax. If you own residential property that is rented out to tenants, you will face two main types of property tax in the UK: Income Tax and Capital Gains Tax (CGT).
1) Income Tax
The amount of income tax you will have to pay depends on whether you personally own your property portfolio or whether it is held within a Limited Company or Limited Liability Partnership. If you are using one of these legal structures, you will need to pay the same rates of corporation tax/ tax on dividends/ income tax that apply to any other company.
Assuming you personally own your property portfolio, you will need to declare your rental income via a self-assessment tax return, due no later than 31st January each year. Any profits will be added to your other income (e.g. a salaried job, other business income) and taxed at the current rate. To calculate your likely tax on rental income, you can consult the Government’s website for current tax bands and rates.
Tax on rental income can be off-set against certain allowable expenses, including:
- Mortgage interest
- Letting agents’ fees
- Accountants’ fees
- Insurance
- Maintenance and repairs (but not improvements)
- Service charges
- Ground rent
- Council tax and utilities if paid by you, not the tenant
- Legal fees for lets of a year or less or for renewing a lease for less than 50 years
- Direct costs of letting the property, such as phone calls, stationery and advertising
If you are providing the property as a furnished let, you can claim 10% of the net rent as a ‘wear and tear allowance’.
As you will see from the list above, the main running cost that can reduce tax on rental income is mortgage interest. This is why many buy-to-let landlords take interest-only mortgages, where the capital is only repaid at the end of the term. If you choose to take out an interest-only mortgage, be aware that you MUST have a plan in place for paying back the capital at the end of the mortgage term, or you could lose the property! Speak to your property accountant before taking this route.
2) Capital Gains Tax
Capital Gains Tax is only payable if you sell the property and you receive more money than you paid for it, once costs and allowance expenses have been taken into account. You can also incur Capital Gains Tax if you transfer the property to someone else, or you receive an insurance pay out in the event that the property has been destroyed. Currently, CGT is calculated at 18% for basic rate taxpayers and 28% for higher rate taxpayers.
Note that you don’t have to pay any Capital Gains Tax on your main home, so if you can prove that the property has been your main home at some point in the past, you can usually claim tax relief for the final three years’ ownership.
It may also be possible to claim ‘Entrepreneur’s Relief’ if you are selling a Limited Company that holds properties as part of a business. This would reduce the amount of CGT to 10%.
Reducing your property tax bill
The best way to ensure you do not pay more property tax than you need to is to engage a qualified property accountant, who can advise the best legal structure and help you claim all allowable expenses, thus reducing your tax on rental income.
