Buy-to-let Taxation

3rd March 2014

If you are considering purchasing a residential buy-to-let property, you may not be fully aware of the tax implications. Usually there will be two taxes that you may have to pay.

These are, income tax, which is payable each year based on your profit from the property, and capital gains tax, which is payable when you sell the property and is based on the sale proceeds of the property less the cost of the property, or other appropriate base value, less all available CGT reliefs/exemptions.

Income Tax

Usually there will be two types of income that you will receive from your tenants – rent & deposits. Rent is taxed each year, based on the income that is due to you during a tax year rather on the rent that you actually receive during the year. For example, if a tenant pays you in advance, only that part which falls within the tax year will be taxed in that year. The remainder will be taxed in the following tax year. Similarly, if a tenant is late paying you, that part which was payable in the earlier tax year will still be taxed in that year. The only exception to this is when a tenant defaults on a payment and you will not be able to recover the amount due. Deposits are not taxable whilst they are still repayable to the tenant, but once either part or all of the deposit ceases to become repayable, ie because there has been damage to the property, then this will become taxable at this point.
There will be various expenses that you will incur on your property, those that you can offset against your rental income (allowable expenses) and those that you cannot offset against your rental income (disallowable expenses). The more usual items are listed below:

Allowable

  • Advertising the property for let,
  • Repairs to the property and general maintenance costs,
  • Cost of services provided to your tenants, such as utilities,
  • Managing agents fees,
  • Insuring the building and contents,
  • Interest paid on any mortgage taken out to buy the property (in certain cases, relief is granted on other loans taken out since the property was purchased).

Disallowable

  • Renovation work and improvements made to the property, e.g. replacing an item with a one of a higher specification, installing central heating, carrying out any work which was accounted for by a reduced purchased price for the property,
  • Capital repaid on any loan taken out to buy the property,
  • Costs incurred whilst the property is not available for letting,
  • Costs of purchasing/selling the property.

These lists are not exhaustive and we would therefore recommend that you seek advice regarding any expenditure incurred to ensure that you obtain any tax relief available. Where an expense is not allowed for income tax you may be able to obtain tax relief for these expenses once you sell the property and this falls within “Capital Gains Tax”.

There are additional rules regarding furnished lettings, including furnished holiday lettings. These rules may result in you being able to claim additional expenses against your income. If your letting is furnished, please contact us so that we can discuss these additional rules with you to see if you can make additional claims.

Capital Gains Tax

The gain that is subject to tax is the proceeds that you receive from the sale less the price that you paid for the property, or other appropriate base value. These costs will include your costs of purchasing and selling the property, such as legal expenses, estate agents fees and stamp duty. If you have carried out any improvements to the property, including renovation work and these costs have not qualified for relief under the income tax rules then you may be able to get relief for these expenses now. The amount of tax that you will eventually pay will depend upon the length of time that you have owned the property and whether you have lived in the property at any time during your ownership.

Administration

You are required to complete a personal tax return, including the relevant Property and Capital Gains supplementary pages, and pay your tax liability for each tax year once your letting has commenced, even if you do not already receive a return from HMRC. HMRC charges penalties where the Tax Return is submitted late and interest where the tax is paid late



 
Other Blogs in Private Client Tax
 
Barbara Nicholas
19th September 2017 HMRC advice on phishing emails and bogus contact

  I have blogged on this subject before. Unfortunately, this type of fraud is on the increase.   HMRC have published an up-dated warning with examples of bogus emails, text messages, and social media scams purporting to be from HMRC.  They also mention again bogus callers leaving messages about the need to make immediate tax…

Read More »

Jeannette Hume
18th September 2017 R&D Tax Relief: HMRC publish take-up report.

R&D tax relief, to provide government subsidies to those companies that develop innovation products, services or systems, has been with us for 17 years now. The latest HMRC R&D tax relief take-up report, encouragingly, shows that the following recent improvements to the scheme have increased the amount of tax relief claimed by 22% over the…

Read More »

Richard Alecock
12th September 2017 Childcare Services compensation

  The government are offering compensation to those who have been affected by problems with the implementation of Tax-Free Childcare. Individuals who have been affected may be able to get a government top-up as a one-off payment for Tax-Free Childcare. The government will also consider refunding any reasonable costs directly caused by the service not…

Read More »

Jodie Tarbin
6th September 2017 Bank of Mum and Dad!

  A parent with spare funds to invest may like to consider purchasing a property for their student son or daughter to live in whilst at university, in order to save on student accommodation costs.   We recently advised a client that, so long as their son or daughter lives in the property as his…

Read More »

Donna Gidney
31st August 2017 Caution over 2016/17 P800 tax calculations issued by HMRC

If you are employed or getting a pension, HMRC will check that you have paid the right amount of tax for the tax year.  If you have under or overpaid, they will issue a P800 tax calculation.  The calculation is broken down into various sections to show your income, deductions, tax allowances, and the tax…

Read More »

Neil Groom
31st August 2017 Life Interest Trusts and Mandated Income

With the taxation of dividends and interest having changed with effect from April 2016, many trusts may face the requirement to file an annual tax return and pay income tax on their income, even though the income (and credit for the tax paid) will also be declared by the trust beneficiary.   HMRC allow trustees…

Read More »