Tax for Landlords - The Basics

It’s all too easy to forget about tax when you’re a new landlord. The excitement of getting your first property ready to be let, working with your agent as they find a tenant, working out the return you’ll receive on your asset, can all get in the way of making sure you’re clear on the tax implications.

 Or maybe you’ve been around the block a few times, having let out multiple properties during a number of years, and you’re wondering what the tax implications of selling a whole portfolio are.

 In this Tax for Landlords series, we aim to give you useful information and applicable tools (good news for spreadsheet enthusiasts!) that will serve both new and seasoned landlords alike. We’ll start with a brief overview of your tax responsibilities as a Landlord, and in future articles we’ll be sharing the tools that we’ve developed over my years as an investor with a large portfolio.

The BIG question: Who owns the property?

 One of the biggest matters you need to consider is who will be the legal owner of the property, as this could drastically affect the way that tax is applied. There are multiple options when it comes to ownership, but we’ll concentrate on two only.

 ·      Property owned in individual or joint names (typically partners).

·      Property owned by a company, that in turn is owned by an individual or group of individuals.

For this first article, we’ll look at tax in the first instance (property owned in individual or joint names.

Let’s get right to it.

 As a landlord you pay tax when you buy a property, you pay tax yearly whilst it’s being let, and you pay tax when you sell the property.

When you buy – Land and Building Transaction Tax (LBTT) (aka Stamp Duty)

In Scotland, at the moment of purchasing a property, you may be eligible to pay Land and Building Transaction Tax. This tax was previously known as Stamp Duty Land Tax and in England it continues to have that name. Property buyers are eligible when the residential property is worth over ￡145,000*, and the rate of tax depends on the purchase value.

If you are already a property owner, you are also eligible to pay an Additional Dwelling Supplement (ADS) if the property is worth over ￡40,000. At the time of writing, this supplement is 4% of the purchase price.

 On the other hand, if you are a first time buyer, the threshold for LBTT increases from ￡145,000 to ￡175,000, increasing the chances that you pay no duty tax at all.

 For up to date information on the matter, please always check the Scottish Government’s Website.

When your property is let – Income tax

If you make money from letting your property, this is taken into consideration as part of your total income and you will pay tax on that depending on which bracket you fall into. For up to date brackets and rates, please take a look at the HMRC website.

 As a landlord, you’re entitled to a ￡1,000 tax-free property allowance, meaning if you make less than ￡1,000 a year from letting property, you don’t need to tell HMRC. If you are self-employed as a landlord – in other words, you don’t run a limited company and you file a self-assessment tax return – you’re also entitled to a ￡1,000 tax-free trading allowance.

If you’re running a business, making more than ￡5,965 a year from letting property, being a landlord is your main occupation, you have multiple properties in your portfolio and are buying new properties, you may also be eligible to pay class 2 National Insurance. Even if you don’t check all of these boxes, you can choose to pay National Insurance payments to keep your State Pension topped up.

What can and can’t you claim?

Residential landlords can claim for the day-to-day expenses of running their properties, including:

·      Bad debts

·      Business costs like phone calls, travel and running a home office

·      Fees for services by professionals like accountants, letting agents, solicitors or surveyors

·      Ground rent on the property

·      Insurance cover, including for buildings, contents, and rent guarantee

·      Interest on loans and credit purchases (but limited to the basic tax rate, thus you won't be able to claim all the interest of the mortgage that you may have for the property if you are a high rate tax payer - More about this very tricky subject - Section 24 - in another article to follow)

·      Repairs to and replacements for the property

·      Services like cleaning or gardening

·      Utility bills and council tax (while the property is unoccupied)

Residential landlords are not able to claim:

·      the costs of buying property, getting it into a rentable condition, or making improvements (these expenses are part of your capital gains tax calculation when you come to sell the property – you had to spend that money to make what you did on the sale, so it’s subtracted from your gain before capital gains tax applies.)

·      “regular and predictable” travel costs – like journeys between your home and office, or between the properties you already rent.

·      wear and tear allowance on a property you are not letting as fully furnished.

When you sell - Capital Gains Tax

If you decide to sell a property that’s not your home, and make a profit (well done!) you may be eligible to pay Capital Gains Tax. HMRC provide a tax calculator for working out how much this tax is. we’ll also be providing you with the spreadsheet we personally use to work out my taxes. The calculation is based on the gain – meaning the market value of your property, minus any estate agents’ fees, solicitors’ fees, and the costs of major improvement works (building an extension would be included in the calculation; redecorating would not). As such the level of capital gains tax differs for basic rate taxpayers. At the time of writing, it is currently set at 28 per cent for higher and additional rate taxpayers.

Overview

As a landlord you may have tax responsibilities at the time of buying, letting and selling your property. Please bear in mind that I’m writing this article as a humble fellow landlord. This brief article gives you a decent idea of what that those taxes are, but given there can be many intricacies to your particular case, as well as potential relief for example for married couples, we recommend you consult a tax professional. Over the next few weeks, we’ll dive into some of these intricacies and share the tools that have served me well.

*Accurate at the time of writing, January 2020.