All buy to let landlords have to pay tax on the amount of income they receive from tenants who are renting out their properties.
Certain expenses can be offset against this figure, such as landlord insurance, letting agent’s fees, accountant’s fees, service management costs (if it’s an apartment) and software costs. Any losses incurred from previous years can also reduce the current tax bill.
Until a few years ago, it was also possible for landlords to claim back their full mortgage interest costs, but this has since been phased out, to the extent that by 2020 there won’t be any relief on mortgage interest at all. Instead, all landlords will receive what is known as a ‘tax credit’, which is 20 per cent of the mortgage interest payments (additional rate tax payers could previously claim 40 per cent and higher rate tax payers 45 per cent).
This works out worse for landlords in two ways:
- They can’t claim as much against mortgage interest as before
- They have to declare how much of the rent is being paid against the mortgage
In the case of (b) this makes the declared tax figure higher, which in turn could potentially push a standard tax-paying landlord into an additional rate payer and the latter into a higher tax payer.
One way to mitigate against the above could be for an individual landlord to become a limited company. He or she would then be charged corporation tax, which is a straight 19 per cent (and will be going down to 18 per cent in 2020). However, in order to change from a personal to a corporate tax payer, the landlord would first have to sell the properties which would incur capital gains tax (and which, in some cases, could prove unprofitable).
Tax rates for landlords
The amount of tax a landlord will pay depends on which income bracket he or she is in i.e. 20 per cent, 40 per cent or 45 per cent. An additional rate tax payer who, with profits from property goes above the threshold of £40,000 a year, will pay the higher rate of 45 per cent on the excess i.e. if his or her total income is £55,000 then £40,000 will be taxed at 40 per cent and £15,000 at 45 per cent.
Paying tax on more than one buy to let property
It’s possible to add up the income from several (or more) properties and reduce expenses from the total figure, regardless of which property relief is being claimed for. That is unless a property is located overseas – in which case it will be subject to a separate tax entry.
Sending off a tax return
The tax year runs from April 6 to April 5 the following year. Landlords who pay personal tax (rather than corporation) can fill in the return online and send it by Jan 31 or send a paper return earlier (by October 31). New landlords must notify HMRC by Oct 5 of any income and by the same date if a property has been sold and at which point Capital Gains Tax is due – at 18 per cent or 28 per cent depending on the landlord’s income bracket.