There are a couple of ways to invest in property as a landlord. Both involve complex financial components, one being tax. Ideally, you will want to minimise tax payments as much as possible to get the most out of your investment. In this article we will take a look at some of the tax implications for landlords and how to maximise profits in the long term.
What Tax Do You Pay On Investment Property?
When investing in property as a landlord, it is crucial to consider how much tax you will be paying. This includes: Stamp Duty, Capital Gains Tax on sale and Income Tax on profits made from renting it out as there will all affect your overall proceeds
- Stamp Duty
If you buy an investment property in England or Northern Ireland, you will usually have to pay Stamp Duty. Land Transaction Tax is the equivalent in Wales and Land and Buildings Transaction Tax applies in Scotland.
In England and Northern Ireland you pay SDLT on properties that cost more than £125,000, or if it is a non-residential property, more than £150,000. There are different rates of tax depending on property price, whether you own another property, and where in the UK you live.
Until 30 June 2021, Stamp Duty is only paid when the purchase price exceeds £500,000 due to the Stamp Duty Holiday. On 1 July 2021, the threshold will lower to £250,000 until 30 September 2021, and then from 1 October 2021 the threshold will revert to £125,000.
Furthermore, you pay an extra 3% on top of the relevant Stamp Duty band when you buy an additional property, whether it be a holiday home or a residential buy-to-let property.
- Capital Gains Tax
Whether or not you pay Capital Gains Tax on your profits from a property sale depends on whether it’s your main home, ie: the property you live in for most of the time or have lived in within the last three years.
If you sell your main home in the UK, this will generally mean you won’t have to pay CGT as you can claim Private Residence Relief on any profit as long as certain conditions have been met. If you rented out part or all of your home during any period of ownership since 31 March 1982, you might need to pay CGT.
If you sell a different property, ie: a holiday let or a rental property or a property, you can’t claim Private Residence Relief and might need to pay CGT. The same applies if you bought a house for someone else to live in.
When you sell a property in the UK, you deduct your tax-free allowance from your total overall gains. You then add this to your taxable income. If total is within the basic rate Income Tax band you’ll pay a rate of 18% on any profits. If you’re a higher or additional-rate taxpayer, you will pay 28%. The annual CGT tax-free allowance is £12,300 for the tax year 2021/22.
Couples who co-own their property can combine their individual allowances, potentially enabling a gain of £24,600 before having to pay CGT.
- Income Tax
If you rent out a property, you may need to pay income tax on the profits, depending how much you make and your personal circumstances. You treat these profits as you would your income.
You can minimise the tax you pay by making sure you calculate the profits correctly. This involves knowing what you can deduct as allowable expenses such as letting agents’ fees, Council Tax and buildings insurance.
Since 6th April 2020, Income Tax relief on residential property finance costs has been restricted to the basic rate of Income Tax. Different rules apply to properties owned by companies or landlords with furnished holiday lettings.
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Allowable expenses
Allowable Expenses can be deducted from your rental income when calculating your taxable profit, as long as they are exclusively for the purpose of renting out the property.
Replacement of Domestic Items Relief – This is where tax relief is given against rental income for:
- The cost of replacement items
- Less the cost of any element of improvement (beyond the nearest modern equivalent)
- Less any proceeds of sale of the old item
- Plus any costs of disposing of the old item
Relief is given for ‘domestic items’ including:
- Moveable furniture
- Furnishings such as carpets, curtains and linen
- Household appliances such as fridges and freezers
- Kitchenware such as crockery and cutlery
- Televisions
Items must be provided solely for the use of the tenant within the residential property and relief is not available if Rent a Room relief is claimed.
Rent a Room Relief Scheme
If you let a room/rooms in your house to lodgers, you can either class this as a residential property let or you can claim Rent a Room relief.
To qualify the room must be accessible from inside your house, not a separate annex, and the lodger shares common areas like your kitchen.
The Rent a Room Scheme has tax dis/advantages depending on your situation.
The rules are:
- you don’t pay tax on the first £7,500 of rental income
- you can’t deduct expenses or wear and tear allowances
- if you make a loss, you can’t deduct it from your other taxable income.
If your house is jointly owned, each of you can claim £3,750 of tax relief meaning a combined claim can add up to £7,500 worth of tax relief allowed under the scheme.
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Holiday Lettings And Tax
If you rent out a furnished holiday home which meets certain conditions, you might get a capital allowance for furnishing the property. Points to consider:
- The property must be in the UK or European Economic Area (EEA)
- You can’t usually let it to anyone for more than 31 days at a time.
- It must also be available for let for at least 210 days a year, as furnished holiday accommodation and actually let for at least 105 days.
Capital allowances are available on fixtures, other integral features, and other costs incurred within your furnished holiday let which might include on furniture etc.
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