Buy to let basic information
Posted on 16th June 2021
Duty and tax
The threshold for Stamp Duty Land Tax (SDLT), which is normally £125,000, was temporarily increased to £500,000 until 30 June 2021, and will now go down to £250,000 until 30 September 2021, before returning to the normal level.
When you buy a second home for £40,000 or more, which is not a replacement for your main home, a land tax supplement of 3% is due on the entire purchase price up to £500,000. The supplement increases for properties above this price. If you buy a residential property through a company, the company will pay the land tax supplement
From 1 April 2021, a non-resident buying residential property will normally have to pay a further 2% SDLT supplement, so it’s important to check the criteria.
As an individual landlord you must pay income tax on your ‘property income’ which will be on the rent you receive less the tax-deductible costs, so you will need to complete a self-assessment tax return.
Where a rental property is owned jointly in the names of a married couple or civil partners, you can take advantage of your tax allowance if one of you has little or no other income. As joint tenants with equal shares in the property the income must be declared equally in your tax returns. As tenants in common with, for example one partner owning 70% and the other 30%, you can apply to HMRC so that your tax return can reflect this ownership arrangement.
If you own a property together but aren’t formally married or in a civil partnership you can agree to share the income as you choose, although this normally reflects how the property is owned.
When you sell the property, any capital gain above your annual allowance will be split according to the ownership of the property and will be taxed at 18% or 28%, depending on your income.
If the property is owned by a company, income and capital gains will be taxed at 19%, although from April 2023 this rate is due to increase.
To let your property
You will need to make sure that the condition of your property is good enough for a tenant to move in, subject to cleaning, furnishing, and drawing up letting agreements. If you need to renovate the property to make it suitable to rent you can’t claim the costs as allowable expenses. However, you might be able to off-set them against Capital Gains Tax (CGT) when you sell the property, so be sure to keep good records.
Expenses such as advertising or minor repairs, before the first tenant moves in can be deducted from the rent you receive in the first tax year.
There are two categories of expenses. The capital expenses involved in buying, selling, or improving your property can’t be off-set against your income tax.
However, other costs that recur as tenants change are known as revenue expenses, which can generally be off-set against your tax.
Allowable revenue expenses can include:
accountancy fees to prepare property accounts
advertising for tenants
ground rent and service charges for a leased property
heating and lighting costs
insurance for the building, and its contents, where applicable
legal fees for drawing up tenancy agreements or collecting debts
letting or managing agents’ fees
maintenance and repairs.
Since 2020, finance charges such as loan interest and arrangement fees can’t be deducted from your rental income. However, companies can deduct all finance costs for rental properties.
You can deduct the cost of replacing furnishings used in your rental property such as carpets, curtains, and free-standing appliances, but not their initial cost.
The cost of repairs can be deducted from your rental income. The difference between a repair and an improvement is that a repair restores what was originally in place, without adding to it. You can’t split the cost of a project between improvements and repairs. You would need a quotation and invoice for each type of work.
Selling your rental property
If you decide to move in to your rental property yourself or to sell it you can’t deduct any revenue expenses incurred after the tenant has moved out, such as redecoration, for example.
When you sell your rental property, it will probably be for more than the purchase price. You must report the gain to HMRC online and pay any CGT due within 30 days of the sale. If the gain is more than your annual allowance (£12,300 for the 2021/22 tax year) it must also be included in your self-assessment tax return. The difference between the sale and purchase price, after your allowance has been deducted, will be taxed at 18% or 28%, depending on your income.
You can deduct solicitors’ and estate agents’ fees paid on the sale and purchase, land tax paid on the purchase, and the cost of improvements while you have owned the property.
Please get in touch if you are considering investing in a buy to let property. We will be happy to give you some advice.
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