If you happen to be a landlord, you will need to be fully aware of your tax responsibilities. On this page, we will reveal all the buy to let tax or taxes that you need to know about... AND how to minimise them!
Yes, rental income needs to be reported on your tax return... But to soften the blow somewhat, many associated expenses are tax deductible. In other words, you can deduct your amount of expenses from the amount of buy to let tax you have to pay.
If you are a cash-basis taxpayer, then you will need to report your rental income on the return for the year you receive it, despite how it was earned. Cash basis taxpayers will need to deduct their expenses when incurred rather than do that when they are paid. In most cases people use the cash method for accounting purposes.
Great question... here's a pretty comprehensive list of what you can consider rental income:
The first buy to let tax you will need to pay if you plan on building a buy-to-let portfolio is stamp duty when you’re making a purchase of a property.
The good news when it comes to stamp duty is that you can claim it back by offsetting it against capital tax liability when you’re selling. Stamp duty was levied before as a percentage of the whole purchase price, but that was changed back in the Autumn Statement of December 2014.
Buyers now work on paying stamp duty progressively instead, based on the purchase and how much over the threshold it actually is. Since then the bands are now set at 0% for £125,000 and up to 12% for those above £1.5million.
Under this system, anyone who buys a home under the price of £937,000 will be paying less or even the same. Those buying will have a chance to pay less in taxes, making this a big win for those who were caught in the tax trap.
You will need to have a complete self-assessment tax return to pay your income tax on any rental income you receive. The money you will need to pay will be mostly determined by income tax banding.
If you happen to be a basic rate taxpayer, then you will need to consider that you will pay 20%, 40% and up to 45% for the higher and additional rate. You can mostly reduce the amount of buy to let tax you will need to pay by working on offsetting so-called allowable expenses.
The big deal is that you can claim for interest on buy-to-let mortgage payments, as they will allow you to make offsetting the mortgage interest against the rental income so you can work on paying the income tax on the gap between both.
You do need to understand that things are changing however, since plans are that from 2017 all of this will be limited to about 20% tax relief and calculations will overall be different. This could dent rental profits so only time will tell once the changes in policy set in.
You can also offset some other things that are considered as allowable expenses. This will include arrangement fees for setting up property loans.
Maintenance costs will also need to be considered, as well as letting agent fees with landlords being able to cover and claim 10% for wear and tear yearly on any finished property.
This will however change in April 2016 when the wear and tear allowance will be scrapped and landlords will only receive tax relief on expenditure that they actually make.
You can also claim for contents insurance and buildings, council tax as well as utility bills if your tenant has failed paying them. You should check with an accountant just in case if you’re not sure what to claim for.
When you need to sell your buy-to-let property, there will be the capital gains tax you need to pay on any of your profits. This type of buy to let tax will kick in when you sell your property at a profit of more than the usual annual allowance.
This can also be combined with the one for civil partners and married couples. It applies to any and all properties that are not your main home, something that is known as Principal Private Residence. This is something that gets a special exemption.
This tax has been levied at 18-28% depending on whether you’re talking about basic rate or even higher rate taxpayers. This means that the majority of landlords will be making good profits with a 28% rate.
If you have a single property and this is actually considered you’re your only property and principle home, then you will not have to pay this buy to let tax. The taxman will also need evidence that you are indeed living in that place. Civil partners and married couples are allowed to have only one Principal Private Property.
When you pass away your buy to let portfolio will also form part of the estate. This will also mean that whoever inherits the portfolio itself will have a tax charge of about 40% of the total estate if it exceeds £325,000 for singles or £650,000 for married couples.
There are ways you can reduce this inheritance task by making gifts to your relatives and putting some of the estate in trust. This will be more complex, as you will have to handle things rather differently than you do with funds, shares or cash.
Check back soon for more buy to let tax articles!
A recap of the current UK stamp duty rates and some tips on how investors can reduce or even eliminate stamp duty entirely!
Article granted by Ella A. on behalf of: http://removalcompaniestwickenham.co.uk/