Contents
What Taxes Do Landlords Have To Pay?
Let’s start with what kind of property taxes are available and when they must be paid.
When it comes to the property tax life cycle, there are three critical considerations. You pay tax on a property when you purchase it, every year it is rented out, and later on when you sell it.
When Buying/Renting/& Selling
Income Tax
Generated income is the money a property owner receives for letting another person or organisation utilise their property. This revenue includes rent payments in advance, late payments, and ongoing payments. Payments received for lease cancellation and returned security deposits are also considered rental pay.
According to your overall income, if you earn money by renting out a property, you may be required to file a self-assessment tax return with the HMRC. The income tax rate that you pay varies depending on your income. In the 2021 Budget, Chancellor Rishi Sunak announced a modest increase in income tax levels in April 2021, following which they would be fixed until 2026.
From April 2021 onwards, the personal allowance will be £12,570. Anything you earn beyond that, up to and including £50,270, is taxed at the standard rate of 20%. If your income exceeds £50,270, you will be subject to the higher rate of 40 per cent tax; and if your income exceeds £150,000, you will be subject to the different rate of 45 per cent.
Landlords are entitled to an annual tax-free property allowance of £1,000, which means that if you get less than £1,000 in rental income each year from your property, you don’t have to notify HMRC. If you are a self-employed landlord – that is, if you do not operate via a limited company and instead submit a self-assessment tax return – you are also entitled to a £1,000 tax-free trade allowance each year.
If you earn between £1,000 and £2,500 a year from your property rental, you must notify HMRC to be required to pay tax on that income. If you earn between £2,500 and £9,999 after allowed expenditures, or more than £10,000 before acceptable costs, you will be required to file a self-assessment tax return. You may be required to pay income tax on the amount earned after allowable expenses.
To file your self-assessment tax return, you must complete a paper form by the 31st of October each year. Nonetheless, keep in mind that, starting on April 6, 2024, the government’s Making Tax Digital program will become effective for self-employed landlords and anyone with property or company income above £10,000. All VAT-registered companies will be obliged to comply with Making Tax Digital regulations beginning in April 2021.
Non-Resident Landlords
If they earn income from renting out UK property, non-residents of the UK and have their “normal place of residence” outside the UK must register as non-resident landlords with HMRC. If they don’t, either the leasing agency they choose or the renters must withhold 20% of the rental revenue as tax. To avoid tax withholding, spouses who are joint property owners must each register individually under the program.
How do I report rental income that I haven’t disclosed?
You may submit a voluntary disclosure via the government’s Let Property Campaign if you believe you have neglected to report rental revenue. There’s a chance you’ll have to pay a fine, but If you fail to submit a voluntary disclosure and HMRC discovers it later, you may be subject to a harsher penalty or criminal prosecution. The government has created a questionnaire to assist you in determining if you are required to report unpaid taxes under this program. Visit the gov.uk website for further information.
What happens if you don’t disclose your rental income on your tax return?
You may be one of the many landlords unaware that they must report their rental income to HMRC, but failing to do so could cost you money. You may find yourself with a hefty back-tax bill. You may face a monetary penalty. Or, even worse, you might be charged with a crime.
HMRC has a variety of tools at its disposal to detect rented property revenue. They can look into renter deposit records and monitor information from leasing brokers and municipal governments. HMRC also holds information on landlords who receive housing assistance payments directly from tenants. It’s always a good idea to double-check with HMRC if you’re not sure whether you need to disclose your rental income.
Capital Gains Tax
A capital gains tax may arise when you sell an asset that isn’t your primary residence – such as a house that you’ve purchased, refurbished, and then rented out – and earn a profit. In addition, if you inherit property, you may be subject to capital gains tax. Individuals and personal representatives will have their yearly exempt amount raised from £12,000 to £12,300 as of April 6, 2020. It has been raised to £6,150 for trustees of settlements.
However, the 2021 Budget did not include a rise of up to 40% capital gains tax for higher-income taxpayers, contrary to popular belief. To figure out how much capital gains tax you owe, the HMRC has developed an online tax calculator that you may use. the amount of tax to be paid is calculated based on the gain – which is defined as the market worth of your home removing any estate agent’s fees, legal expenses, and the price of significant renovation work
The capital gains tax indeed varies depending on whether you are a primary or extra rate taxpayer. Still, for higher and additional rate taxpayers, the rate is presently fixed at 28 per cent. Residents of the United Kingdom are now required to pay within 30 days after completing the sales transaction.
In the past, they were allowed to include it in their yearly income tax return after waiting until the end of the tax year had passed. “Leasing relief” is a term that you may have heard of. Landlords who resided in the houses they rented out were eligible for a discount in capital gains tax. Leasing relief will no longer be offered to landlords who do not reside in the same house as their renters as of April 2020.
Private home relief, on the other hand, may still be available in your situation. Capital gains tax is reduced by a percentage depending on how many years you lived in the property and how long you lived in it in the nine months before you sold it. Suppose you stayed in the same house for five years before renting it out for another fifteen.
The first five years, plus the final nine months that you leased it out, would qualify you for private home relief. You held the property for five years and nine months, which is 28.7 per cent of the period. Therefore, you would qualify for private residence relief on 28.7 per cent of the gain you realise upon selling your home.
CGT Tax Reliefs
- Investor’s Relief: Individual investors who sell ordinary shares in an unlisted trading firm are entitled to Investors’ Relief. It applies to disposals made on or after April 6, 2019, and kept for at least three years before disposal.
- Business Asset Disposal Relief: BADR lowers the CGT rate you pay on qualified profits to 10%. The lifetime maximum will be £1 million starting on March 11, 2020.
- Business Asset Rollover Relief: If the profits from the sale of eligible company assets are used to buy a replacement, the Business Assets Rollover Relief enables you to defer paying CGT.
- Incorporation Relief: Individuals or partners (in a business partnership) operating an unincorporated business and transferring the business, together with its assets (excluding cash), to a limited company in return for shares are eligible for incorporation relief. The person may then postpone paying CGT until the shares are sold. More information may be found in HMRC’s Incorporation Relief guidelines.
- Gift Hold-Over Relief: When the Hold-Over Relief is in effect, a person does not have to pay CGT when gifting a business asset; the gift recipient must pay CGT when the item is sold.
Keeping Records for Capital Gains Tax
Keep receipts, invoices, or bills that indicate the date and amount of the following:
- The asset’s initial purchase price
- The asset’s market value on other dates: In your CGT computation, you may need to obtain an asset assessment or appraisal if you utilised the asset’s market value on specific dates (rather than its original cost).
- Expenses for improvements: This is the amount of money you paid to increase the asset’s worth.
- Additional costs paid: Additional expenses that you may have expended to sell or dispose of an asset include legal fees, valuation fees, Stamp Duty, charges incurred to establish your ownership of the item, and fees paid for expert advice. You may be able to deduct them from your CGT computation.
- The amount of money you were paid for the asset: Payments in instalments or compensation, such as insurance payouts, fall under this category.
How to Work Out Your Capital Gains Taxes in the United Kingdom
CGT is deducted from your other taxable earnings. Your tax bracket for the current tax year is determined by the sum of your many sources of income: If your total taxable income is less than £50,000, the capital gains rate on most chargeable assets (excluding residential property) is 10%, and if you are still in the whole band, it is 18%.
If your capital gains push your taxable income into the next band, you’ll pay 20% on most of your chargeable assets and 28% on your house – but only on the number of your capital gains that pushes your taxable income into the next band. In the United Kingdom, capital gains tax is levied at different rates.
Property Tax
ACCORDING TO THE OECD, the UK, behind the United States, has the second-highest property taxes in the industrialised world. Property taxes in the UK account for more than a tenth of all taxes (about 12.5%) collected from the country’s use, transfer, and property ownership.
In the United Kingdom, there are two types of property taxes. When you purchase a home in the United Kingdom for more than a particular amount, you must pay Stamp Duty Land Tax (SDLT). Only residential properties worth more than £125,000 and non-residential land and buildings worth more than £150,000 are subject to SDLT.
In England and Northern Ireland, stamp duty is due; Scotland has its Land and Buildings Transaction Tax, while Wales has its own Land Transaction Tax. Each nation imposes surcharges for individuals purchasing buy-to-let investment properties and second houses.
The SDLT is a stepped-rate tax, similar to income tax; you may use an online calculator to understand how it works. Within 30 days after completing the transaction, you must submit your SDLT return to HMRC and pay the tax. Specific exclusions exist that enable you to reduce your UK property tax, such as if you purchase several homes.
The second kind of property tax in the United Kingdom is Council Tax. Like income tax, this local municipality tax is graduated or banded. Every year, each municipality evaluates the properties in its jurisdiction and calculates the taxes due based on the assessed value. A variety of factors influences the council tax rate.
Stamp Duty
You must pay tax if you purchase a home in the United Kingdom for more than £125,000. Depending on your location and circumstances, the precise tax you pay and the particular value of the property that triggers it will vary. Depending on the amount of the property purchased, the purchase date, and if you are a multiple house owner, stamp duty rates vary from 2% to 12% of the purchase price. A 3% fee on each threshold band will be applied to anybody buying an “additional” residential property.
If the revenue from a short-term property rental (up to seven years), residential tenancy, or lease is over the threshold, you will have to pay SDLT as a landlord if you are purchasing to let. For non-UK residents, a 2% fee was introduced to each of the rates of stamp duty shown below on April 1, 2021.
For main residence purchase
| Purchase price bands (£) | Rate (%) |
|---|---|
|
Up to £125,000 |
0% |
|
£125,001 – £250,000 |
2%
|
|
£250,001 – £925,000 |
5% |
|
£925,001 – £1.5 million |
10%
|
|
Over £1.5 million |
12% |
For the purchase of ‘additional’ property
| Purchase price bands (£) | Rate (%) |
|---|---|
|
Up to £125,000 |
3% |
|
£125,001 – £250,000 |
5%
|
|
£250,001 – £925,000 |
8% |
|
£925,001 – £1.5 million |
13%
|
|
Over £1.5 million |
15% |
What is the cost of stamp duty for first-time buyers?
First-time buyers who are buying a home for up to £500,000 qualify for the following reduced rates. To be eligible, you and your co-buyer must be first-time buyers.
For main residence purchase
| Purchase price bands (£) | Rate (%) |
|---|---|
|
Up to £300,000 |
0% |
|
£300,001 – £500,000 |
5%
|
There will be no first-time buyer exemption if your home is worth more than £500,000, and you will be subject to standard rates.
The standard stamp duty regulations
Individuals in England and Northern Ireland typically pay Stamp Duty Land Tax (SDLT) on residential properties valued at £125,000 or more, as well as non-residential buildings or land valued at £150,000 or more. Within 14 days after making the transaction, you must submit an SDLT return to HMRC and pay the SDLT. If you have a solicitor, agent, or conveyancer, they can handle it for you, or you may submit a return and pay the tax yourself.
Land and Buildings Transaction Tax (LBTT) is levied on residential properties worth more than £145,000 and non-residential assets worth more than £150,000 in Scotland. On homes valued at more than £40,000 in Scotland, there is additionally an Additional Dwelling Supplement. If you currently own a home and want to purchase another, you must pay this tax. Revenue Scotland receives all LBTT payments via an internet interface.
Land Transaction Tax (LTT) is levied on residential properties worth more than £250,000 and non-residential assets worth more than £225,000 in Wales. There are extra levies for residential homes worth more than £40,000 if you already own one and purchase another, much as there are in Scotland. You must submit an LTT return to the Welsh Revenue Authority and pay your LTT within 30 days of completing the transaction. This may be done on your behalf by your solicitor, agent, or conveyancer, or you can submit a return and pay the tax yourself.
These are only the fundamentals. If you’re purchasing a home for the first time, the stamp duty levels are usually higher, so you may not have to pay. Stamp duty rates for buy-to-let properties are graded and start at a lower value than for other property purchasers.
Is it possible to add stamp duty to my mortgage?
If you can’t pay your stamp duty, you may borrow extra on your mortgage to offset the cost. All you have to do now is figure out how much stamp duty you’ll have to pay and raise your mortgage borrowing to cover it. Just keep in mind that you’ll have to pay interest on that additional borrowing, which may mount up over a mortgage’s typical 25-year term.
Adding stamp duty to your mortgage may result in a higher interest rate if your loan-to-value ratio rises substantially.
Is there a stamp duty on fixtures and fittings?
Removable fixtures or “chattels,” such as freestanding furniture, rugs, or curtains, are exempt from stamp duty. It does, however, apply to building-attached fixtures and fittings such as bathroom and kitchen fixtures, as well as built-in closets. Remove the value of detachable fixtures from the overall price of the property to lower your cost.
If carpets are included in the sale of an apartment, for example, the buyer and seller must agree on a reasonable price that represents their age and condition, then deduct that amount from the overall price to compute stamp duty. Buyers have been known to exaggerate the value of fixtures to minimise their stamp duty payments, but HMRC has clamped down on this practice. The worth of the fittings should be able to be justified to the taxman.
What if you have more than one property?
A lot of landlords have a lot of properties. When this is the case, tax obligations are treated similarly to those of any other company. All rentals and expenditures from comparable properties are combined into a single number for self-assessment. This implies that you must split your properties, rentals, and expenditures along the lines of:
- UK rentals: it includes any buy-to-rent or shared home that is leased on a short-term basis.
- Overseas rentals: any homes leased on a long-term basis in another country.
- Holiday lets: Houses that qualify as furnished vacation rentals are situated inside the European Economic Area (EEA). Holiday houses located outside of the European Economic Area are classified as overseas rentals.
What If you do not make a profit?
If your allowed expenditures exceed your rental revenue throughout a year, you incur a loss for tax reasons. This loss will be carried forward and used to offset future rental earnings. You can’t save losses to utilise when it’s convenient for you, such as avoiding paying higher income tax rates. Each year, you must balance losses against available earnings until they are depleted.
Expenses
A landlord should claim property costs. Every pound you spend on a property lowers your earnings, which lowers your income and your tax bill. It’s not about evading taxes; it’s about paying your fair share. You are entitled to a £1,000 tax-free property allowance and a £1,000 tax-free trade allowance if you are self-employed. You cannot, however, claim any business costs if you are claiming your £1,000 tax-free “trading allowance.”
The allowance is for low-income side companies since you’re likely to have more significant expenditures and revenue. If your total yearly rental income is between £1,000 and £2,000, you should only claim a tax-free trade allowance. Landlords frequently overlook rental income that should be reported on a self-assessment tax return. If you keep money from a deposit to pay for repairs or cleaning after a tenant is out, you must report it on your tax return. Below is a list of expenses that you can claim or cant claim tax returns.
What Can You Claim?
Landlords may claim for the costs of operating their properties on a day-to-day basis, including:
- Council tax and utility bills
- Ground rent on the property is covered by insurance, which includes coverage for the structure, contents, and rent guarantee.
- Interest on credit cards and loans
- The property’s repairs and replacements
- Bad debts
- Costs of doing business, such as phone calls Traveling and working from home
- Fees are charged by professionals such as accountants, letting agents, lawyers, and surveyors for their services.
- Cleaning and gardening
What Can’t You Claim?
- You can’t deduct the expenses of purchasing a home, putting it up for rent, or making renovations.
- You can’t claim “regular and predictable” travel expenses, such as trips between your house and your workplace or between the properties you currently rent.
- You can’t claim wear and tear allowance on a home that isn’t wholly furnished and isn’t rented out.
Tax Savings
There will likely be tax savings and allowances available to you, whether you’re saving for a rainy day, investing for retirement, or everything in between.
For Married Couples
Married couples’ tax laws are complex, but they may allow people to transfer assets between one another legally and transparently to lower their tax burden.
We’ll go through some of the options available to a couple. Given the incredibly complicated nature of taxation affecting married couples, it may be prudent to seek the advice of a tax expert to conduct a thorough examination of your circumstances.
If you Both pay income tax
You may form a business partnership if you and your partner are both basic rate taxpayers. Business partners are jointly and severally liable for any losses the company suffers, any bills the company incurs, and any profits earned by the company – but each partner is only liable for the tax on their share of the losses, costs, and profits. By forming a partnership, you may avoid having one member pay income tax at a higher rate.
Are there benefits to being an LTD company?
Private limited businesses are legally distinct from their owners, have separate finances, and can retain any earnings after paying corporation tax. A private limited business has the benefit of allowing you to pay yourself a salary that is taxed at the introductory rate of income tax and have your spouse claim Marriage Allowance or give your partner a different wage. The remaining earnings will be distributed to shareholders as dividends. If you wish to bring additional members of your family into the business, shares may be purchased, sold, and transferred. It’s a method of avoiding paying the higher rate of income tax.
2021/22 Landlord Tax Changes
Mortgage interest tax relief
In 2017, the government started phasing down mortgage interest tax assistance by 25% per year to eliminate it by 2021 entirely. As a result, landlords may no longer deduct mortgage interest from their income in 2019.
Instead, landlords are now eligible for a 20% tax credit on all property financing expenses. The policy’s goal is to raise the amount of tax paid by higher-rate and additional-rate landlords, who previously benefited from substantial tax deductions. Taxpayers at the introductory rate should pay about the same amount as they did before.
One-off wealth tax proposals
Instead of raising income tax or VAT, the government was contemplating a one-time “wealth tax” to assist the nation recover from the economic impact of Covid-19. The Wealth Tax Commission recommended an extra 1% tax for individuals with assets above £500,000 or £1 million for married couples earlier this year. Mortgage debts, on the other hand, will not be deductible. These ideas, however, were not included in the Spring Budget, although they may be reconsidered in the future.
Buy-to-let income tax rates 2021
So, what are the rates and categories for individual income tax in 2020-21? The amount you may earn before you have to pay income tax is known as your allowance. This is now £12,500, which is unchanged from last year.
The higher rate threshold for rental income was raised to £50,000 last year, at which time you begin paying the higher rate of tax (40%) on your earnings. The threshold for the different rate (45%) remains at £150,000.
Capital gains tax
The Office for Tax Simplification (OTS) proposed increasing capital gains tax to align with income tax in January 2021. It was anticipated that capital gains tax might be increased by 40% for wealthier taxpayers. However, the UK Government did not make a statement on capital gains tax in the 2017 Budget, much to the relief of landlords, and the current rates will stay in place until April 2026. No immediate adjustments were announced for corporate taxes, but the rate will increase to 25% from 19% in 2023.
Capital gains tax allowance increase
Capital gains tax has changed in many ways, including how and when it is paid.
First, there’s lettings relief, which used to be accessible to anybody renting out a home they used to live in but is now only available to live-in landlords who share an apartment with renters. The private residence relief is the following change.
This used to be a percentage decrease in your overall capital gains tax payment depending on how long you lived there plus how long you leased it for the last 18 months. This 18-month extension has been reduced to nine months. This is a little complicated, and if you need additional information, you can find it above. Finally, the deadline for sellers to pay capital gains tax has been shortened, from the end of the tax year to within 30 days.
Landlord Tax FAQ
In most cases, buy-to-let landlords are unable to recover VAT on their costs. While HMRC considers renting out houses to be a VAT-registered company, it is an exempt one. Exempt companies are unable to recover VAT paid on costs, which may be bad news for landlords.
You may postpone paying taxes by executing a 1031 exchange into another investment property if you’re facing a high tax payment due to the non-qualifying use part of your property. This allows you to postpone the realization of any taxable gain that would otherwise be subject to depreciation recapture and capital gains taxes.
Building insurance is not required by law for landlords, but mortgage lenders frequently require it. A standard homeowner’s policy isn’t designed for rental properties; you’ll need landlord insurance to protect your investment if it’s vandalized or flooded.
It is your duty as a landlord to assess and report the value of your rental property to guarantee that it is insured to its total replacement cost. If you bought the house with a mortgage, your lender would almost always have a surveyor provide a valuation, including a rebuild value. If you don’t have a mortgage valuation, you may get assistance from the Royal Institution of Chartered Surveyors by going to BCIS. However, we suggest that you get professional advice from a trained surveyor for a more accurate assessment.
When you start receiving renting revenue as a landlord, you must inform HMRC. If you earn money by renting a property, you may be required to file a self-assessment tax return (depending on your total income) to pay the tax due on your rental income.
When you rent out your home, you must inform your mortgage lender. Failure to do so will result in a breach of your mortgage’s legal terms. A ‘permission for lease’ from your mortgage lender is needed to rent your home.
Yes, however, you should do a thorough tenant reference check, including a credit check, using a reputable referencing company like Tenant Verify. A complete tenant reference check will often include checks for ‘right to rent,’ credit history, address, and historical address verification, as well as identification and credit history validation.
Before the tenant moves out, the tenancy agreement should state how much notice is needed to terminate the lease. Before the renter vacates the property, examine it by going through it with the tenant and the inventory checklist, noting any damage or problems with cleanliness, and taking photographs. This ensures that the leased property is returned in the same condition as when it was first rented.
A simple explanation of how rental income taxes work: How is rental income taxed if you own a property and rent it to tenants? Rental income is taxed like regular income, in a nutshell. You’ll pay £1,100 if you’re in the 22% marginal tax rate and have £5,000 in rental income to declare.
Because stamp duty is only charged on land purchases, removable fixtures and fittings, often known as chattels, including freestanding closets, couches, refrigerators, carpets, and drapes, are not subject to SDLT and therefore may be deducted from the total property price. Everything connected to the property, such as light switches, is theoretically a component of it and is subject to SDLT.
If a seller is willing to part with certain items, you and the vendor should agree to pay a reasonable amount and deduct it from the agreed-upon purchase price. A competent tax lawyer or conveyancer can help you with this.
Everyone buying a residential or non-residential property in England and Northern Ireland, including foreign purchasers, corporate entities, and non-natural people, must pay stamp duty.
The rate you pay is determined by the price range of your property and its location; rates in Scotland and Wales differ from those in England and Northern Ireland. It also depends on whether you have to pay a premium because you’re buying a second home or a buy-to-let property.
Conclusion
If you understand your tax obligation, it would be easier for you to make the most of your property holdings. This article examined how you pay tax when you purchase, rent, or sell a home and how the value of the home and your total income determine whether you are subject to higher tax rates.
Knowing precisely what you may and cannot claim as expenditures are essential to managing your responsibility.
In the meanwhile, maintaining precise records of your expenses, remaining up to date with developments, and running all of your choices by a property tax specialist can ensure that you stay on the right side of HMRC when the time comes.
