All property transactions involve paying some sort of tax and investment properties are no different, if fact, landlords can bear the taxation burden more than most! You do need to understand the implications of both taxation and stamp duty on your investment purchase…
Landlord Taxation and Stamp Duty
When you start renting out a property, you must tell the tax authorities (HMRC).
Any profit you make from renting out a property is subject to Income Tax. The amount of tax you pay on this is subject to your total taxable income and will be taxed based on prevailing tax bands.
If you’re eligible, you may also be able to claim Income Tax reliefs, which means that you either pay less tax to account for the money you’ve spent on specific items or get your tax repaid. Sometimes you get these tax reliefs automatically, but there are others you must apply for.
In order to calculate your costs, it may be worthwhile setting up a separate account for your rental income. This way, it will be easier for you to work out your profit.
It is very important to remember that only profits from renting your property are liable for income tax and that to calculate your profits, you’ll have to deduct “allowable expenses” first.
You need to know the difference between revenue and capital expenses.
Revenue Expenses are costs relating to the day-to-day running and maintenance of the property and can be offset against an income tax bill.
Capital Expenses are expenses that will increase the value of the property, such as renovations. These can’t be deducted from your income tax bill, but you may be able to offset them against Capital Gains Tax.
Revenue expenses include:
- Any letting agents’ fees
- Certain Legal fees
- Accountants’ fees
- Buildings & contents insurance
- Interest on any property loans
- Maintenance and repairs
- Utility bills
- Rent, ground rent and service charges
- Council tax bills
- Services such as cleaning or gardening
- Any other direct costs such as phone calls and advertising
Landlord Tax Changes
In the 2015 summer budget, the Chancellor announced a change to the legislation on “allowable expenses”.
It was announced that tax breaks for buy-to-let landlords would be curbed in order to “create a more level playing field between those buying a home to let and those buying a home to live in”.
As a result of these changes, the amount of tax landlords can reclaim as relief was capped at the basic rate of tax over the course of a four year period which began in 2017.
Tax is not the same for everyone. It depends on an individual’s specific circumstances and we advise any landlord to seek professional advice before embarking on a ‘Buy-to-Let Road Trip’…
The Chancellor also made a radical change to Stamp Duty rules by adding an additional 3% on top of the standard rates from April 2016 for ‘second homes’..
The table shows the Purchase Price banding and the effective rates of Stamp Duty on ‘second homes’ and investment properties. Second homes include Holiday Lets and Buy-to-Let Investments.
How We Can Help
At Professional Properties, we do offer a Property Sourcing Service where you meet with us and tell us the answers to all the questions above in a lot of detail!
We call it the ‘Buy-to-Let Road Trip’…
We then go away and find suitable properties that meet your requirements.
To book your FREE, NO OBLIGATION Property Sourcing Workshop, please click below: