Taxing Rental Income – Staying Updated

Investing in Buy-to-let properties (BTLs) remains an attractive prospect mainly because most people still view bricks and mortar as assets that, at the very least, retain their value. Another factor is that unlike shares and most other investments, a building is tangible. You can see and feel it.

In this post, I will concentrate on the tax implications of having, and generating income from, residential property in the UK. Please note that the following does not distinguish between owning one property or several.

At the time of writing (17 September 2015), income from BTLs is liable to four main taxes:
– Stamp duty
– Income Tax
– Capital Gains Tax
– Inheritance Tax

STAMP DUTY

This is a one-off unavoidable tax that applies when buying any property. The current rates are:
£0 – £125000 (0%)
£125,001 – £250,000 (2%)
£250,001 – £925,000 (5%)
£925,001 – £1,500,000 (10%)
Over £1,500,000 (12%)

Note that if a property is bought for £150,000, the stamp duty applicable will be calculated as:
The first £125000 (NIL)
The balance of £24,999 (£150,000 less £125,001) at 2% = £499.98
Therefore the total to pay = £499.98

INCOME TAX

Rental income is taxed in bands of 20%, 40% and 45% depending on the overall income the landlord is taxable on. As with other income (if self employed), expenses incurred in the course of the tax year may be used to reduce the overall tax payable. The main reliefs are:
– Mortgage interest (*see below for new changes)
– Insurance, ground rents, rates, council charges
– Repairs and maintenance
– Agents’ fees
– Accountant’s fees
– Legal fees
– Wear and Tear allowance – 10% of net rent (*see below for new changes)
– Others such as mileage, telephone expenses, etc involved in checking on property or tenants where necessary

*The recent budget (2015) introduced some drastic changes effective from 2017:
– Landlords within the basic income rate band are unaffected but those on higher rates will see their expenses decimated as mortgage interest relief will be limited to the basic rate band relief.
– The Wear and Tear allowance is to be replaced by a relief that is only triggered when furnishings are replaced.

CAPITAL GAINS TAX

This is chargeable on net gains made when an asset is sold. The gains may be reduced by the annual capital gains allowance (currently £11,100) if not already used for other purposes. The excess is then taxed at 18%. Capital Gains Tax is not payable if a loss is made.

INHERITANCE TAX

As the property (or properties) is part of the estate, its value is included in working out the total total tax payable. In the current year, values up to £325,000 is not chargeable but amounts over that are liable to 40% tax. Ouch!

The above does not constitute personal advice and I will not be liable for any loss(es) incurred for reliance on the post. If you need professional assistance with the accounting and financial aspects of your BTLs, get in touch.