Landlords: all you need to know about tax
Since April 1st 2016 the Stamp Duty purchase tax charged on buy-to-let properties has changed. An extra 3% Stamp Duty is now paid by landlords on top of the standard rate, which varies depending on the value of the home being bought.
For example, anyone buying a buy-to-let house or flat for £500,000 before April 1st 2016 would have paid Stamp Duty at 5% or £12,500. Under the new system the rate is (5%+3%) = 8% or £20,000.
For tax purposes the profit from a property must be declared as personal income and paid at a rate of either 20%, 40% or 45%. Which level will depend on the tax band your total annual income falls into.
Landlords used to be given generous tax allowances that they could claim tax again. But in 2017 the government began gradually reducing the tax breaks it grants to private landlords.
Landlords and investors were once able to offset a proportion of their taxable income against their allowable expenses including the mortgage interest, which is normally the largest business expense.
How much they could offset depended whether they were a basic rate taxpayer (20%) or a higher rate payer (40%).
But between 2017 and 2020 this tax relief is being gradually reduced and will drop to zero in 2020. This means for example that a 40% tax payer who currently pays £1,680 tax on a rental income of 15,000 will pay £6,000 in tax by 2020.
You can claim some expenses to offset against your tax bill but the rules on these have changed too recently.
From April 2017 onwards, landlords have only been able to claim a maximum of 20% of their mortgage interest payments against their tax, a reduction from the former 45% upper limit. Also, landlords must now only claim receipted wear and tear costs for a property, instead of being allowed to claim an allowance regardless of expenditure.
Capital Gains Tax (CGT)
Capital Gains Tax (CGT) is payable on any profit made on the sale of a buy-to-let property – or in other words the difference between the purchase price and the sale price.
This is charged at different rates depending on your tax bracket, but it’s a bit more complicated that that. There in a threshold of nearly £12,000 per person which is offset against the total ‘gain’, as can the cost of any improvements, extensions or upgrades completed on the property. Also, any legal or estate fees paid when buying and selling the property can be deducted from a landlord’s CGT bill too.
Once a final figure has been established, then each person who owns the property then pays tax on their half of the liability at a tax rate of either 18% if they are a basic rate tax payer or 28% if they’re a high or higher rate tax payer.