Understanding ‘Buy-to-Let’ tax implications

Thinking about venturing into the world of property rental? Or perhaps you're already navigating the landlord life? Either way, being well-versed in your tax responsibilities is crucial.

Tax regulations in the UK are dynamic and navigating them can be intricate. To shed some light on this matter, we've crafted a comprehensive guide to help you grasp the tax implications associated with renting out a property.

How does renting out a property affect my income tax?

Every penny you receive in rent, including non-refundable deposits and additional payments from tenants for services like communal area cleaning, property maintenance, or utility bills, constitutes income and must be declared. The same applies to any surplus from a deposit returned at the end of a tenancy.

Rental profits are subject to taxation at the same rates as your other income, ranging from 0% to 45%, depending on your tax band. Combining rental income with other earnings may push you into a higher tax bracket. This is particularly important if you're considering property rental as a supplementary income stream.

When it comes to tax payments, you must declare rental income for the tax year it's due, irrespective of when you actually receive it.

As for expenses, you can deduct allowable expenses related to work done within a tax year, regardless of when the bills are settled.

Landlord tax relief

Before April 2017, landlords could deduct mortgage interest payments from their rental income before tax. However, since the 2017-18 tax year, a new buy-to-let tax regime has been phased in. From 2020, landlords can no longer deduct mortgage interest payments; instead, they qualify for a 20% tax relief on the entire sum of interest paid.

This change means landlords in higher tax brackets may end up paying more tax than before, as they'll be taxed on the total rental income rather than the income minus mortgage interest.

Do I pay capital gains tax on property?

Selling a buy-to-let property typically incurs capital gains tax (CGT) on the profit made, not the property's selling price. Likewise, if you've let out all or part of the property, a portion of the gain upon sale could be taxable.

Basic-rate taxpayers pay 18% on capital gains, while higher and additional-rate taxpayers pay 28%.

There's a tax-free allowance of up to £12,000 per person (or £24,000 for married couples jointly owning assets) for the 2019-20 tax year.

Starting from 6 April 2020, taxpayers selling UK residential property subject to CGT must pay the tax within 30 days of the sale's completion. This includes submitting a 'residential property return' and making a payment on account.

It's worth noting that if the property was your former residence, you may be eligible for letting relief, reducing your CGT liability.

Managing letting income and expenses

As a landlord, it's essential to maintain detailed records of your rental income and expenses. This not only helps you accurately report your taxes but also allows you to maximize your tax deductions. Keep receipts for all expenses related to your rental property, including repairs, maintenance, insurance, and letting agent fees.

By staying organized and proactive in managing your finances, you can ensure compliance with tax regulations while optimizing your rental property investment.

Let Felicity J. Lord help

If you're a landlord or considering renting out your property and want to delve deeper into potential tax implications,get in touch with Felicity J. Lord. We're here to assist you every step of the way.