Tax for landlords
24th January 2018 posted in Landlords
Income tax on your earnings
You are liable for tax on the profit you make from renting your property. This is based on your personal circumstances and the earnings you make when your expenses have been deducted.
You should inform and agree with HM Revenue and Customs (HMRC) how you are going to be taxed and of your earnings within six months of the end of the tax year, or risk a fine. Even if you do not earn enough to pay tax, if HMRC ask you to complete a tax return, you should do so.
The rate of tax you pay is based on how much of your income is above your personal allowance (the standard personal allowance is £11,000), and how much falls into each tax band.
These are the tax bands for April 2017-18. You only pay tax on the amount of income which falls into each band.
Band |
Taxable income |
Tax rate |
Standard personal allowance |
Up to £11,500 |
0% |
Basic rate |
£11,501-£45,000 |
20% |
Higher rate |
£45,001-£150,000 |
40% |
Additional rate |
Over £150,000 |
45% |
Upcoming changes
The main expense for landlords is the mortgage, but you can only deduct the interest part of the mortgage, not the capital repayment. Currently, landlords get tax relief on the interest they pay at the rate at which they normally pay tax; ie up to 45%.
From 4th April 2017, changes are being phased in to the amount of tax relief landlords can get on the mortgage interest they pay. Ultimately, landlords will only be able to claim tax relief at the basic 20% income tax rate.
While this will largely affect higher rate tax-payers, those at the top end of the basic rate may find themselves pushed into the next bracket by the changes, as their profits will rise, on paper at least.
These are the changes are being phased in:
Date |
Percentage of finance costs taxed at tax-payer’s usual rate |
Percentage of finance costs taxed at basic rate of 20% |
April 2017 |
75% of finance costs |
25% |
April 2018 |
50% |
50% |
April 2019 |
25% |
75% |
April 2020 |
0% |
100% |
Upcoming changesIf the tax changes will significantly decrease your income, you may wish to invest in property through a limited company. For more information about this, talk to the experienced lettings team at Hunters, who will be able to point you in the right direction.
HMRC has a free e-learning course but this is no substitute for individual advice from a property tax expert.
Tax when you sell
When you sell a rental property, you are liable for Capital Gains Tax (CGT) on the profit you make.
You don’t have to pay full CGT on the sale of your home (as long as it doesn’t exceed 5,000 sq m) or if you transfer the asset to your spouse or civil partner, but gains made on a rental property are subject to tax. Selling it cheaply to your children or to a business partner may still be subject to CGT.
The basic rate is 18%, rising to 28% for those in higher tax brackets. Visit HMRC for the latest rates.
You can deduct some of the costs associated with buying, selling and renovating, including the stamp duty paid.
Capital Gains Tax examples
|
Example 1 |
Example 2 |
Your example |
Purchase price |
£100,000 |
£150,000 |
|
Stamp duty (post April 2016) |
£3,000 |
£5,000 |
|
Renovation costs |
£2,000 |
£5,000 |
|
Selling price |
£115,000 |
£175,000 |
|
Capital gain |
£10,000 |
£15,000 |
|
Capital Gains Tax at 18% |
£1,800 |
£2,700 |
|
Capital Gains Tax at 28% |
£2,800 |
£4,200 |
|
Currently this is due on 31st January, following the tax year in which you sold.
From April 2019, the tax will become payable within 30 days of selling the property.