Why become a landlord?
Many people view an investment in residential property as an alternative pension plan. The let property can also provide a secondary income stream. The income from the property is taxable but with some forward planning the lower tax bands and personal allowances of family members can be used to minimise the tax payable.
How should the property be held for tax purposes?
The amount and timing of the tax payments due in respect of rental income depends on how the landlord holds the property:
Single individual
All the income, losses or gains arising from the let properties should be declared on the individual’s own self-assessment (SA) tax return.
Where the landlord has not previously submitted SA tax returns, he should budget to pay 150% of the tax due for the first tax year of lettings on 31 January, when the SA tax return is due. This is because the landlord won’t have made payments on account (POA) of the tax due, leaving the full amount of tax payable as a balancing payment on 31 January following the tax year end, plus 50% as a POA for the next tax year. In later tax years, the tax will be paid mostly as POA in two instalments on 31 July and 31 January.
Two or more individuals
It’s not possible to transfer the income from a let property to another person before tax is paid, without first transferring part or all of the beneficial interest in that property. Letting a jointly held property does not amount to a partnership business.
Limited company
Where the landlord already owns a company that holds surplus funds not needed for its trade, investing in buy-to-let property can be a profitable use for those funds. The company will need to secure a mortgage for the balance of the purchase price and corporate mortgages tend to have higher interest and arrangement fees than individual mortgages.
What property related costs are classed as Tax deductible?
Expenses associated with letting fall into two categories, Capital costs, which must be deducted from the gain made on the sale of the property and Revenue costs, which is basically all other costs. However, not all revenue costs can be deducted from the rental income for tax purposes. If the tenant is responsible for paying a bill ie.council tax, the landlord cannot then also claim a deduction for that cost.
The types of expense that are tax deductible will tend to fall under these headings:
– Accountancy fees for drawing up the property business accounts
– Advertising for tenants
– Ground rent and service charges for leased property Heating and lighting
– Insurance for the buildings and contents
– Interest and Finance (we explain this more thoroughly further into this article)
– Legal fees for drawing up tenancy agreements or collecting debts
– Letting or managing agents’ fees
– Maintenance and repairs
– Travel to the property
– Replacement of furnishings
– Water charges and council tax
This is not an exhaustive list, other costs may be deductible.
Interest and finance issues and deductions
Where an individual landlord borrows to finance their property business, the interest and arrangement fees related to that loan can be deducted in full for periods before 6 April 2017. The borrowed funds can be used for any purpose within the letting business, from property purchase to repairs. The loan doesn’t have to be secured on the let properties for the interest to be deductible, it can be secured on the landlord’s own home. However, in such cases, to demonstrate where the funds have come from a balance sheet should be drawn up for the lettings business.
Restrictions from 2017 Individual landlords (not corporate landlords) will have their interest and finance costs disallowed for tax purposes, in these proportions in each tax year to 2020:
2017/18 = 25%
2018/19 = 50%
2019/20 = 75%
2020/21 and later = 100%
In place of the interest and finance charge that has been disallowed, the landlord will receive a 20% credit to set against the income tax payable on the rental income. Any unused tax credit will be carried forward to be relieved against tax payable on rents in a future tax year. This change is going to have a devastating effect on landlords who currently pay high interest charges.
If you are a landlord or are considering a buy-to-let property, get in touch and we can discuss the whole situation in more detail