October 4, 2021
How much tax do I pay as a landlord?
It’s a crucial question that many landlords will be asking themselves to work out how much profit they will make on their rental property. But how much tax are landlords faced with and how has this changed in recent years?
Here, we take a closer look.
There have been a number of tax changes affecting landlords in recent years as the government has sought to dampen down the booming buy-to-let market.
Perhaps here are the two biggest. First, the additional 3% stamp duty surcharge introduced in April 2016. Second, the phasing out of mortgage interest tax relief which came to a close in April 2020.
To cool the buy-to-let market the government of the time introduced an extra 3% tax to be levied on the purchase of buy-to-let properties and second homes. This would make it more expensive to buy this type of property.
However, the market has adjusted to this change and the extra levy has now been baked in. Dramatic talk of the death of buy-to-let was way wide of the mark. In fact, quite the opposite has happened.
Meanwhile, the phasing out of mortgage interest tax relief began in April 2017. It ended last year, again with the intention of making buy-to-let less profitable.
The buy-to-let mortgage interest tax relief landlords can claim was steadily reduced until it reached the basic income tax rate of 20%. You can find out here more about the changes, which were far from straightforward.
Many landlords have worked round this change by putting their portfolios in limited companies – known as incorporation. This would make them more tax-efficient, although this does come with its risks and rewards.
On top of this, there is an additional 2% stamp duty surcharge for any overseas buyer, to make it more difficult for foreign purchasers to buy in the UK. The change was introduced in April 2021. It impacts expats who are returning to the UK after many years away and wealthy investors alike.
What other tax responsibilities do landlords have?
According to gov.uk, landlords must pay Class 2 National Insurance if their profits are £6,515 a year or more. This will be the case if all the following apply. Being a landlord is your main job. And you rent out more than one property. And you’re buying new properties to rent out.
Even if your profits are under £6,515, you can make voluntary Class 2 National Insurance payments, to ensure you get the full state pension when it’s owed to you.
You do not need to pay National Insurance if you’re not running a business. Even if you do work such as arranging repairs, advertising for tenants and arranging tenancy agreements.
As a landlord, the first £1,000 of your income from property rental is tax-free. It is known as your ‘property allowance’. You should contact HMRC if your income from renting property is between £1,000 and £2,500 a year. You must report it on a Self Assessment tax return if it’s: £2,500 to £9,999 after allowable expenses, or £10,000 or more before allowable expenses.
You can find out more about the tax you must pay as a landlord, including costs you can claim to reduce taxes and how to work out your profit, by clicking here.
What about Capital Gains Tax?
As a landlord, it’s highly likely that you’ll be required to pay Capital Gains Tax (CGT). This is the tax paid on the profit made when selling assets such as property – when you come to sell your rental home.
CGT is calculated by deducting the amount you originally paid for the property from the eventual sales price, and then making any additional deductions for costs and improvements. You’ll then need to set your gain against the annual exemption allowance (currently £11,700) and then pay tax at the required rate on any gain over this allowance.
Depending on your annual income, you’ll need to pay CGT on your final calculated gain, which is charged at a basic rate of 18% and a higher rate of 28%. If you’re thinking of selling a property, you can get an idea of how much your CGT bill could be by using this handy calculator.
But there are some key things to remember with regards to CGT. If you’re selling a rental property within three years of purchase, you’ll be exempt from paying CGT. Every year, there is also an amount your asset can gain which is exempt from CGT. This is known as the ‘annual exemption allowance’.
The annual exemption allowance is larger if the property has multiple owners. It also increases the longer you’ve owned the asset. The costs of home improvements, such as an extension, can be deducted from your gain. What’s more, you’re eligible to deduct the stamp duty you paid when purchasing the property. As well as the solicitor and estate agent fees you pay when selling it, from your gain.
There has long been talk about major changes to CGT, but as of yet these are still just proposals. However, at the last Budget, Chancellor Rishi Sunak did place a freeze on CGT allowances to help raise funds to cover the cost of the Covid-19 pandemic.
Are landlords responsible for council tax?
The majority of landlords with occupied, tenanted properties will not need to worry about council tax, as it’s the tenant who is liable for the charge.
However, this all changes when a rental property is left empty and experiencing void periods. During these times, the landlord – as the owner of the property – will be liable to pay council tax.
Landlords owning HMOs (Houses in Multiple Occupation) are also liable to pay council tax from the start. But it’s also perfectly reasonable and right for these costs to be passed on as a charge or as part of the rent, as long as this is clearly outlined in the tenancy agreement.
The above only offers a highlights package of a landlord’s tax obligations. It’s also important to be aware that HMRC are increasingly on the lookout for unpaid tax from landlords as part of its long-running Let Property campaign. Penalties for not declaring tax can be severe. So anyone who is concerned about this should contact a tax expert immediately.
With so much to factor in, it’s vital that you work with a competent, experienced and knowledgeable agent. He can help you to come to terms with your tax obligations and the legal ways you can offset this.
If you have any questions about letting a home in the London area, Atkinson McLeod is here to help.
To find out more about our services and current operations, please get in touch with our expert team today. You can find out how much your home could be worth on the current market by requesting a free and instant online valuation here.
Our 2021 buy-to-let tax guide also offers a comprehensive overview for landlords on what to be aware of from a tax perspective when letting a home.