Tax should be an essential part of the process for landlords, whether they own one or many rental properties.
If an investor jumped into the buy-to-let market in 1996, when it began, they would already be seeing plentiful returns. Back then, the average house price in the UK was £53,394. Now, it is £167,291, an increase of 213.3%.
If this pattern continues, and a landlord receives sufficient income from rents, covering all costs in owning and maintaining the property, buy-to-let can be a rewarding investment.
The setback with any investment is that you will be taxed on your asset. It’s also emerged that most buy-to-let landlord with just one property do not obtain specialist property tax advice. A recent survey questioned investors with more than 11 properties in their portfolio, and 89% confessed to being clueless where tax is concerned.
HM Revenue & Customers (HMRC) is cracking down on landlords who haven’t paid Capital Gains Tax (CGT) on properties that they have sold. Consequences of not doing so can be fines or even criminal prosecution.
Kate Faulkner is the Managing Director of propertychecklists.co.uk, and has found many investors who are ignorant of the requirement to pay income tax. From buy-to-let landlords who have sold without paying CGT, to those signing the ownership of their house to their children without the necessary legal or financial paperwork, these situations can cause significant problems in the future.
Taxes that affect the buy-to-let market
There are certain taxes that affect the buy-to-let market. These are:
Income tax needs to be paid on any rental income, minus the costs. Costs that do not need to be taxed include mortgage interest, letting agent’s fees, insurance, council tax, and maintenance.
To stay in control of taxes, keep all receipts safe and ensure everything is up to date. Additionally, remember to exclude the deposit received from each tenant when calculating rental income. If more than one person owns the property, income can only be claimed to reflect the ownership of the property. For example, if two people each own 50%, they only declare 50% of the income individually.
Capital Gains Tax
This tax is paid on the net gain of the property’s value, minus costs and reliefs. To calculate how much CGT is to be paid, take the gain figure and deduct buying and selling costs, including Stamp Duty Land Tax, solicitor’s and estate agent’s fees, any capital investment on improvements of the property, such as new windows, and then pay tax on what is left. 18% for the basic-rate tax band and 27% for any gains above this band.
If more than one person owns the property, they can each individually use their capital gains tax-free allowance, currently £10,900 per person. If the property you live in is being sold, you are entitled to Private Residential Relief and Lettings Relief. If it is your only house or main residence, you aren’t liable for CGT.
When passing on your home, Inheritance Tax applies. However, the rules are complex, so professional advice must be sought. Property is one of the least tax-efficient assets as there is little tax relief. The estate of someone who owns more than one house will easily surpass the current Inheritance Tax threshold of £325,000.
If a property is bought with someone else, it will be asked if you want to invest as Tenants in Common or Joint Tenants. Always choose Tenants in Common, as this allows shares to be invested in a trust for beneficiaries. Joint Tenants is normally more suitable to couples that buy their home together that they will only pass on when the other dies.
To ensure your property tax is correct, stick to these tips:
- Only seek advice from property tax specialists.
- Be clear on your current income and assets.
- Understand what you can claim for from an income and CGT perspective.
- Know your objectives from a tax and legal standpoint.