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Are Landlords Taxable?
The not so good news is, regardless of your place of residence or tax status, UK income tax is payable on net income from let property within the UK!
The very good news is that you can off set a boatload of expenses against your rental income to reduce your tax bill! And, can split your rental income between husband and wife to stay under the higher rate (40%) tax threshold as long as possible.
Buy-to-Let Property (BTL)
Below Market Value (BMV) property is naturally encompassed within the Buy-to-Let rules. This market is currently on the rise with rentals strengthening certainly in the Midlands (see last weeks Blog & News).
As any unwary Landlord may care to tell you, there can be unexpected expenses that can eat away at your profits (your net spendable income). To counter this, it makes sense to maximise your allowable tax deductions. Her Majesties Revenue & Customs (HMRC) are obliging however, will want you to prove your claim is "wholly and exclusively" for the purpose of letting or managing property. Read on ...
Self-employment
Whether you are employed elsewhere or not, as a Landlord you are receiving rent so you will be deemed self-employed for that purpose. As such, you will need to complete a Self-Assessment (SA) tax return. Whereas this thought may fill you with a certain reluctance, in fact, the self-assessment process gives you the right to reclaim tax from the taxman.
Firstly, it is allowable for married couples to split rental income between them to maximise personal allowances and minimise the highest taxable income. Just figure out which of you is earning the least, and top up that income with most, if not all, of the rental income to delay exceeding the higher rate tax band (40%) as long as possible.
To complete your SA form quickly and without fuss, it is essential you keep all your receipts for expenditure, recording all your individual property details together with itemised income and expenditure against each. A simple ledger will help you do this, obtainable from any good stationers or you can use an Excel spread sheet on your PC.
So what are Deductible Expenses?
1. Mortgage Interest (probably your biggest ongoing expense!) 2. Furnishings 3. Maintenance 4. Ongoing Costs & Fees 5. Past Costs (7yrs)
Mortgage Interest
It is often thought that only loans which are secured against a buy-to-let property are tax deductible. This is not the case as any loan which is used for the purpose of purchasing property to let can be included. So, if you remortgaged your existing home in order to buy property to let, you are allowed to claim back tax on the remortgaged interest portion of the loan. Mortgage interest relief is allowable for each BTL property you purchase.
Furnishings
A furnished property (sitting room, bedrooms, kitchen etc), is likely to let for considerably more than the same property in an unfurnished state but initial costs of furnishing isn't cheap and once part of your tenancy agreement you must maintain that standard of let.
You may however, claim one, but not both, of the following allowable deductions in any tax year: 'wear and tear' allows you to claim back 10% per annum of the rental income. Or, you may use 'renewal and replacement' allowance for 100% of the cost of replacing items including of course, white goods. The latter option is generally more economical if you are replacing furnishings regularly say every 3-years or so. Once you have declared which allowance you are claiming for a property you cannot change your mind.
Maintenance Costs
Any costs incurred in insuring and for necessary repairs to your let property can be included. You can even claim relief for work you intend to carry out during the course of the next tax year (i.e. 2010/11), though you will have to prove you are legally obliged to carry out the work e.g roof repairs, boiler repairs/replacement etc. Your Assured Shorthold Tenancy Agreement (AST) will set out what you are responsible for as the Landlord so proving your claim should not be a challenge with your taxman.
Ongoing Costs & Fees (see In A Nutshell below)
If you are personally doing all the paperwork from your home to administrate your property portfolio, you will be able to claim back a proportion of your domestic bills, including utilities, home insurance, phone together with stationery. Furthermore, you can claim allowances for travel costs, including running/maintaining a car (do keep a car log book for fuel, repairs and servicing), but only when engaged on your property business. This could typically return 20% of your annual car running costs.
If you are paying a Letting Agent (usually between 8-15% of the rent depending on what part of the country your property is located), you may claim his/her fees. Remember too, to claim all fees you have paid to the finder, solicitor, surveyor, lender, broker and any other professional or tradesman when you made the purchase.
Past Costs
You may even claim costs incurred before you purchased your first buy-to-let property. If you have maintained records, tax deductions are available on any expenses that occurred in the 7-years before purchase, with the proviso that they must represent expenses that would be tax deductible if you were to incur them today. If this is the case, you can factor them into your SA return as if you spent the money on the first day of the current financial year. Take advice but such expenses might include research, costs for consultancy, attending seminars and courses, visiting sites, attending auctions, magazine subscriptions, stationery costs etc.
Finally, VAT & Capital Gains Tax (CGT)
Residential rent is at present exempt from VAT.
The sale of an individual's home is not normally subject to CGT as it falls under the 'Principal Private Residence' rule. But CGT (40%) would apply on the sale of a property held for investment purposes such as letting. The interpretation of the rules regarding CGT are best left to an appropriate professional if you are planning to sell any of your BTL portfolio. But for instance, where a property has been both home to the landlord and also let out to tenants, no tax is payable on the gain during landlord occupation, but full tax is paid on any gains made during the period of tenancy. Another point to note is that the tax is only payable by persons who are resident in the UK at any point in the year of disposal so an extended trip abroad might become part of your tax planning.
IN A NUTSHELL ~
1. HMRC want you to claim all you can but play the tax game fairly by keeping good financial records, including all receipts. Or, get a good book-keeper who will do it for you (you can claim his/her wages too).
2. Keep a tight inventory of what is included within the let right down to teaspoons and spare lightbulbs. This may avert any dispute with HMRC over replacement costs.
3. Common allowable expenses include ... Interest on a mortgage or other loans taken out to purchase the let property. Utilities - gas, water, electricity etc - that you as the landlord pay. Buildings and contents insurance. Other insurance such as rental insurance, emergency repair insurance etc Lettings agent and property management charges. Legal and accounting fees. Maintenance and repairs, excluding the cost of improvements. Ground rent and service charges. Council tax paid by the landlord for the property. Unused personal allowances Wear and tear allowance or, renewal and replacement allowance
4. As of 6 April 1996, all taxpayers have been required to keep tax records for 5-years of all purchases and receipts under the Self-Assessment system.
5. Keep diligent records of all payments out, and of all income received, with receipts for all expenditure. Retain invoices of sundry expenses, such as rates and ground rents, as well as interest statements from lenders. Keep invoices for all work carried out or to be carried out during or between lettings, and ensure that the nature of the work is clearly stipulated on quotes/invoices.
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