Tag: landlord tax responsibilities

The Complete 2020/2021 Landlord Tax Guide

by TLAChairman | Nov 22, 2020

We are in the middle of an unprecedented health crisis, which is also impacting business and personal finances nationwide. Some tax changes are being introduced as part of the Government’s wider measures designed to mitigate the economic impact of the pandemic, though these are not directly related to buy to let. See our Coronavirus guide for up-to-date information, and ensure you communicate any changes to your financial situation to HMRC. 

Property taxes can be a complicated business, especially for new landlords. In the flurry of activity around getting your property ready to rent, choosing a tenant and planning what you’ll do with your anticipated new income, it’s all too easy to forget about tax.

Getting on top of capital gains tax, stamp duty, corporation tax, expenses and all the other things landlords have to think about can be a minefield. That’s where this guide comes in. As much as is humanely possible, we’ll tell you what you need to know and do about the taxes you’ll pay as a landlord, how to ensure you’re paying your fair share, clarify key terms, and give you the most up-to-date info about all things tax for 2020/21.

We can’t guarantee edge-of-your-seat thrills and spills, it’s tax after all, but we will touch on the most crucial things you need to know for the coming year and beyond. In this guide we’ll address:

1. What taxes do landlords pay?
2. Tax effective property ownership
3. Property expenses – what you can and can’t claim
4. Extra tax savings for married couples
5. New buy to let tax changes for 2020/2021

Bear in mind, this guide is meant as a general overview of the current tax landscape. For further, more in depth personal tax advice tailored to your specific requirements and circumstances, make sure you seek professional advice from a tax specialist.

1. What taxes do landlords pay?

Let’s begin by looking at what property taxes exist, and when they have to be paid.

There are three key moments to think about in the property tax lifecycle.

You pay tax when you buy a property, every year you let the property, and later when you sell it.

If you buy a property over a certain price in the UK, you are eligible to pay tax. The exact tax you pay and the specific value of the property that triggers it, will be different depending on your location and circumstances; and you should always seek professional advice for personal tax related queries.

In England and Northern Ireland, individuals pay Stamp Duty Land Tax (SDLT) on residential properties worth £125,000 or more, and on non-residential properties or land worth £150,000 or more. You must send an SDLT return to HMRC and pay your SDLT within 30 days of completing the purchase. Your solicitor, agent or conveyancer, if you have one, can do this on your behalf, or you can file a return and pay the tax yourself.

Property buyers in Scotland pay Land and Buildings Transaction Tax (LBTT) on residential properties worth more than £145,000, and on non-residential properties worth more than £150,000. Scotland also has an Additional Dwelling Supplement, payable on properties worth more than £40,000.

You pay this if you already own a residential property and buy another. All LBTT is paid to Revenue Scotland through an online portal.

Property buyers in Wales pay Land Transaction Tax (LTT) on residential properties worth more than £180,000, and on non-residential properties worth more than £150,000. As in Scotland, there are additional charges for residential properties worth more than £40,000 if you already own a residential property and are buying another. You must send an LTT return to the Welsh Revenue Authority and pay your LTT within 30 days of completing the purchase. Your solicitor, agent or conveyancer can do this on your behalf, or you can file a return and pay the tax yourself.

These are only the basic rules. If you’re buying for the first time, the thresholds for paying stamp duty are generally higher, so you may not have to pay. If you’re buying-to-let, stamp duty rates are tiered and start at a lower value than those for other home buyers. In England, the rates look like this:

While you’re letting property – income tax

If you make money from letting a property, you may have to complete a self-assessment tax return, depending on your total income.

The rate of income tax you pay varies by income. In England, Wales and Northern Ireland, from 2020/21, you pay no income tax if you earn less than £12,500 per year. You pay the basic rate – 20 per cent of your income – on anything after that income, up to and including £50,000.

The higher rate of 40 per cent tax applies to incomes over £50,000 – and if you make more than £150,000, you pay the additional rate of 45 per cent.

In Scotland, you will now pay no income tax if you earn less than £14,585. The higher rate of 40 per cent tax will apply to incomes over £43,430, while the top rate of 45% will remain the same at £150,000.  

As a landlord, you’re entitled to a £1,000 tax-free property allowance: if you make less than £1,000 a year from letting property, you don’t need to tell HMRC. If you are self-employed as a landlord – in other words, you don’t run a limited company and you file a self-assessment tax return – you’re also entitled to a £1,000 tax-free trading allowance.

If you make between £1,000 and £2,500 a year from letting property, you must make HMRC aware of the fact in order to pay tax. If you make between £2,500 and £9,999 after allowable expenses, or over £10,000 before allowable expenses, you will need to make a self-assessment tax return and may have to pay income tax.

If you’re filling out a paper form to make your self-assessment tax return, you must do this by 31 October each year. If you’re returning your self-assessment tax return online, you must do so by 31 January each year. Missed the deadline? Not to worry – here’s what you should do. 

The expenses you are and aren’t allowed to claim for are complex: we’ll cover those later

You may also have to pay class 2 National Insurance, if you’re running a business and:

• You make more than £5,965 a year from letting property
• Being a landlord is your main job
• You rent out more than one property
• You’re buying new properties to let out

You can also choose to pay National Insurance payments even if you’re making less than £5,965 a year from letting property, to keep your state pension topped up.

When you sell property – capital gains tax

When you sell a property that’s not your home – a house you bought, renovated, and let out for instance – and make a profit, you may be liable for capital gains tax. You may also be liable to pay capital gains tax on inherited property. 

From 6 April 2020, the annual exempt amount for individuals and personal representatives will increase from £12,000 to £12,300. For trustees of settlements, the annual exempt amount will increase to £6,150.

HMRC provide a tax calculator for working out how much capital gains tax you have to pay, if any. The calculation is based on the gain – meaning the market value of your property, minus any estate agents’ fees, solicitors’ fees, and the costs of major improvement works (building an extension would be included in the calculation; redecorating would not).

The level of capital gains tax differs for basic rate taxpayers, but it is currently set at 28 per cent for higher and additional rate taxpayers. 

UK residents now have to pay within 30 days of completing the sale. They were previously able to wait until the end of the tax year to include it in their annual tax return.

You may have heard of ‘lettings relief’. This was a reduction in capital gains tax for landlords who lived in the properties they let out. From April 2020, lettings relief will only be available for live-in landlords who are in shared occupation with their tenants.

You may still qualify for private residence relief, however. This is a percentage reduction in capital gains tax, based on the number of years you lived in a property plus the last nine months before you sold it.

Let’s say you lived in a property for five years, then let it out for 15. You would get private residence relief for those first five years, plus the last nine months you rented it out. Five years and nine months is 28.7 per cent of the time you owned the property. You’d therefore gain private residence relief on 28.7 per cent of the gain you make when you sell the property.

Corporation tax vs. income and capital gains tax

Businesses are taxed differently from individual taxpayers, instead of income and capital gains tax they pay corporation tax.

So if you choose to do business as a limited company rather than as a private individual, you may have to register for corporation tax, file a corporation tax return, and either pay corporation tax or report that you have none to pay.

What about landlords with more than one property?

Many landlords have several properties. When this is the case, tax liabilities are considered much the same as when running any other business.  For self-assessment, all rents and expenses from similar properties are pooled together into a single figure. This means you have to divide your properties, rents and expenses up along the following lines:

• UK rentals – any buy to let or shared house rented out on a shorthold tenancy
• Overseas rentals – any properties abroad let on a long lease
• Holiday lets – homes located within the European Economic Area that qualify as furnished holiday lets. Holiday homes outside the EEA slot into the overseas rental category.

2. Tax-effective property ownership

Managing your portfolio to pay your fair share of tax is not easy. The next step in our tax guide for new landlords focuses on who has to pay tax, how multiple properties and portfolios are taxed, and what happens if you make a loss. For accurate tax advice tailored to your personal circumstances, always consult a professional. 

Who pays property tax?

Whoever benefits from owning a property pays the tax. Finding that person means following the money and dividing it between owners, or those who are paid from it, such as property managers.

Example

Imagine you’re letting out a property and allowing someone else to keep the money in return for managing the property. Even though you don’t receive a penny of rental income, you need to declare this on a self-assessment return, indicating where the money ends up – in this case, with the third party acting as your agent.

You need to do this to avoid tax mismatches. Property owners who pay higher or additional rate income tax sometimes attempt to hide their income and reduce their tax bills by passing off someone else – a basic rate taxpayer – as the person who benefits from the income. There are ways to do this legally, either by transferring allowances within a marriage or civil partnership, or forming a business partnership, but misrepresenting your tax situation by hiding where the money goes is not one of them.

What happens if a landlord makes a loss?

For tax purposes, you make a loss if your allowable expenses come to more than your rental income during a year. This loss is carried forward to offset against your future rental profits. 

You cannot store up losses to use when it suits you – for instance, to avoid becoming liable for higher rate income tax. You must offset losses against available profits each year, until they are exhausted.

Example

Your property earns £15,000 each year in rent.

In the 2018/19 tax year, your allowable expenses come to £18,000, leading to a £3,000 loss for the year. You pay no tax that year.

In 2019/20, you bring your expenses under control – down to £13,000 – and make a £2,000 profit. The loss from the previous tax year is deducted from your profit. You carry forward a loss of £1,000, and pay no tax for 2019/20.

In 2020/21, your expenses come down further, to £11,000. You’ve made a profit of £4,000. Deduct the loss of £1,000 to leave a taxable income of £3,000. You’re now liable to pay income tax.

3. Expenses – what you can and can’t claim

As a landlord, you should claim property expenses. Every pound spent on a property reduces profits, which reduces your income, which reduces your tax liability. It’s not tax avoidance – it’s paying your fair share; no more and no less.

If you’re self-employed, you’re entitled to a £1,000 tax-free property allowance, and another £1,000 tax-free trading allowance. However, if you’re claiming your £1,000 tax-free ‘trading allowance’, you cannot claim any business expenses. The allowance is there for low income side businesses – chances are that you have more expenses and more income to handle.

You should only claim tax-free trading allowance if your total income from letting property is between £1,000 and £2,000 a year.

Landlords can easily overlook rental income that they should include in a self-assessment tax return. If you retain money from a deposit to pay for repairs or cleaning when a tenant leaves, for example, this must be included in your tax return.

Example

You retain £500 from a £750 deposit to clean carpets and redecorate after a tenant leaves your property. You must add that £500 to the income you declare on your tax return. You must also add it to the allowable expenses you claim on your tax return, by including the bills for cleaning and redecoration.

The same logic applies if the tenant pays for extra services throughout the year, like gardening costs, or if you reduce the rent to repay a tenant for the cost of a repair they carried out. When you fill in your tax return, you still add the full rental income, but you also add the bill for materials and tradesmen paid for by the tenant as allowable expenses.

You are the landlord – you benefit from owning the property – the tax liability and the book-keeping responsibility both lie with you.

What are self-employed landlords allowed to claim as income tax expenses?

HMRC provides a checklist of allowable income tax expenses for landlords. Exactly what you’re allowed to claim will vary depending on whether you’re letting a residential property, a furnished holiday let or a commercial property.

Residential landlords can claim for the day-to-day expenses of running their properties, including:

• Bad debts
• Business costs like phone calls, travel and running a home office
• Fees for services by professionals like accountants, letting agents, solicitors or surveyors
• Ground rent on the property
• Insurance cover, including for buildings, contents, and rent guarantee
• Interest on loans and credit purchases
• Repairs to and replacements for the property
• Services like cleaning or gardening
• Utility bills and council tax (while the property is unoccupied)

Some of these are straightforward, but some – especially business expenses, interest and repairs – often trip up new landlords. We’ll cover those in more detail.

Bad debts

Rent arrears are the most likely bad debt for a property business.

A debt does not become ‘bad’ just because someone owes the money. The landlord must make some reasonable effort to recover the money, like launching court proceedings or passing the case to a debt collector. Once it’s clear that the debt will not be recovered – if the tenant declares bankruptcy, for example – the debt has gone bad, and become a business expense.

Business costs

HMRC publishes guidance on allowable expenses for self-employed people. These include:

• Office, property and equipment
• Car, van and travel expenses
• Clothing expenses
• Staff expenses
• Reselling goods
• Legal and financial costs
• Marketing, entertainment and subscriptions

A self-employed landlord can claim some of these – the costs of travel with your own vehicle and working from home – using ‘simplified expenses’. Simplified expenses use a flat rate for these costs to avoid complicated calculations: they’re by far the easiest way to claim expenses.

There are some specific things to think about here, as a landlord.

Firstly, your travel expenses. HMRC does not allow you to claim “regular and predictable” travel between your home and your place of work. This means you can’t claim for travelling between your home and your existing properties. You can claim for travelling to view new properties, but only if you end up buying the property.

Secondly, staff expenses. You can pay friends, family and employees who do not own a share of your property, if they’re doing work related to running the property. The rate of pay should reflect the work undertaken – paying your husband £50,000 to keep the books for a buy to let will be treated as tax avoidance. You can also pay for training, as long as you’re reinforcing existing skills. Buying a book or a guide on property tax for landlords is an allowable expense, but signing up for a get-rich scheme for property investors is not.

You can’t use simplified expenses if you’re running your properties through a limited company, or if you’re in partnership with one. For limited companies that you run from home, there are formulas for splitting your bills between personal and business use.

Fees for professionals

These are bills from accountants, agents, solicitors and surveyors.

Costs related to the day-to-day running of the business, like chasing bad debts, evicting tenants in rent arrears and keeping financial records are allowed. Costs related to buying, selling or planning applications for a property are not allowed – they are part of your capital gains tax calculation when you sell the property.

Interest

Landlords used to be able to claim tax relief on interest payments on borrowing to fund business costs such as buying land, property, supplies or refurbishments.

This tax relief has now been phased out.

You now receive a 20 per cent tax credit on these interest payments.

You can only claim the interest – not the actual cash amount – and you must prove the borrowed money was spent on buying land, property or equipment for the property business or funding repairs or improvements.

Repairs and replacements

A ‘replacement’ means replacing or renewing part of the fabric of the property, like a pump for the boiler, a tile for the roof, or a like-with-like kitchen refit.

An ‘improvement’ is a substantial upgrade that adds value: an extension, a loft conversion, or replacing a chipboard and Formica fitted kitchen with an oak and granite one. You can’t claim improvements as expenses for income tax purposes.

You can claim ‘replacement of domestic items’ relief for things like:

• movable furniture; for example, beds and free-standing wardrobes
• furnishings; for example, curtains, linens, carpets and floor coverings
• household appliances; for example, televisions, fridges and freezers
• kitchenware; for example, crockery and cutlery

Replacement of domestic items relief includes any sale or part exchange of the old item, as well as any incidental costs involved in disposal or delivery.

To claim this relief, you must have bought the item for the property, and removed the old one. You cannot claim the initial cost of fitting out a residential property for rental.

You also cannot claim the full cost of upgrading the item. If you replace a £1000 sofa with a £1200 sofa bed, you’re adding value: you can claim back the first £1000 cost as you’re replacing like with like, but the remaining £200 is an improvement and you can’t claim it.

If you’re letting out a fully furnished property, you can claim Replacement Domestic Item relief, which took the place of wear and tear allowance from 2016. Under this scheme, the initial cost of purchasing domestic items for a dwelling house isn’t a deductible expense so no relief is available for these costs. Relief is only available for the replacement item, including:

• movable furniture for example beds, free-standing wardrobes
• furnishings for example curtains, linens, carpets, floor coverings
• household appliances for example televisions, fridges, freezers
• kitchenware for example crockery, cutlery

You cannot claim the costs of buying property, getting it into a rentable condition, or making improvements.

These expenses are part of your capital gains tax calculation when you come to sell the property – you had to spend that money to make what you did on the sale, so it’s subtracted from your gain before capital gains tax applies.

You cannot claim “regular and predictable” travel costs – like journeys between your home and office, or between the properties you already rent.

You cannot claim wear and tear allowance on a property you are not letting as fully furnished.

4: Extra tax savings for married couples

Tax rules concerning married couples are complicated but can enable individuals to shift their assets between each other in a legal and above-board way to reduce their tax bill.

Here we will provide an overview of some of the ways in which a couple can do this. However, given the particularly complex nature of tax relating to married couples it may be advisable to consult a tax professional to carry out a full review of your specific situation.

If one of you doesn’t pay income tax: Marriage Allowance tax update

Marriage Allowance can work for couples where one person is earning less than the personal allowance, (which increased from £11,850 in 2018/19 to £12,500 in 2019/20) and the other person pays income tax at the basic rate, which in 2019/20 usually means their income is between £12,500 and £50,000. The marriage tax allowance went up from £1,190 in 2018/19 to £1,250 in 2019/20. This means the potential tax saving from the higher tax earner’s bill in 2019/20 is up to £250.

So, to benefit from Marriage Allowance, you must be married to (or in a civil partnership with) someone who does not pay income tax, or whose income is below £12,500 a year. You must also be a basic rate taxpayer. It doesn’t matter if you live abroad or are receiving a pension – as long as you have a personal allowance for income tax, you can claim Marriage Allowance.

The person with the lowest income needs to claim Marriage Allowance online. It can take up to two months to process the claim. The person with the higher income will get their new personal allowance when they send in their next self-assessment tax return.

If you both pay income tax: setting up a partnership

If you’re both basic rate taxpayers, one option is to set up a business partnership. Business partners share responsibility for any losses the business makes, any bills the business incurs, and the profits from the business – but each partner only pays tax on their share. Setting up a partnership means you can avoid one person moving into the higher rate for income tax.

Example

As a couple, you earn £50,000 from rent. If this is one person’s income, they would pay the higher rate of income tax – 40 per cent. 40 per cent of £50,000 means a £20,000 tax bill.

If this rent is paid to a partnership, and each partner has a 50 per cent share, each partner receives £25,000 in rental income. That only qualifies for the basic rate of income tax – 20 per cent. 20 per cent of £25,000 each is £5,000 each. 

The couple’s total tax bill is £10,000. However if the share of the property is not equal then percentage payments and the rules around it will differ. We advise you contact a property tax professional to assess your percentage split.

You’ll need to choose a name for your business (it can’t be too similar to an existing company’s name), and choose a ‘nominated partner’ who will be responsible for sending the tax return for the business. The nominated partner must register the partnership with HMRC.

Both members of a partnership must be registered with HMRC. Both partners must send their own self-assessment tax returns and pay income tax.

It’s a good idea to set up as a limited liability partnership (LLP). Partners in an LLP aren’t personally liable for debts the business can’t pay – this keeps you safer in the event that your business struggles in future.

If you might pay higher rate income tax: setting up a private limited company

Private limited companies are legally separate from the people who run them, have separate finances from the people who run them, and can keep any profits they make after paying corporation tax.

The advantage of a private limited company is that you can pay yourself a salary within the basic rate of income tax, and have your partner claim Marriage Allowance, or pay your partner a separate salary. The rest of your profits will be paid as dividends to people with a share in the company. Shares can also be bought, sold and transferred if you want to bring more members of your family into the company. It’s a way to make sure you don’t end up paying income tax at the higher rate.

The disadvantage is that it takes more work to set up a private limited company than a partnership.

You’ll need to choose a company name and registered address, appoint directors and a company secretary, establish and issue at least one share, and draw up a memorandum and articles of association which set the rules for running the company.

It’s only worth doing if you make more than £92,700 a year in rental income (the basic allowance for two people).

5. New buy to let changes for 2020/21

As if buy-to-let tax wasn’t fiddly enough, the rules also change fairly regularly. A range of new measures were introduced in the 2020 tax year for landlords to familiarise themselves with.

These include changes to mortgage interest tax relief, capital gains tax allowance and changes to how capital gains tax is paid on rental properties you used to live in. 

Mortgage interest tax relief

The Government began phasing out mortgage interest tax relief by 25 per cent each year in 2017, planning to end it completely by 2021. As a result, 2019 was the last year that landlords could deduct the interest paid on their mortgage from their income.

Instead, landlords are now given a 20 per cent tax credit for all their property finance costs. The aim of the policy is to increase the amount of tax paid by higher or additional-rate landlords, who used to receive generous tax deductions. Basic rate tax-payers should end up paying more or less the same as before.

Capital gains tax allowance increase

There are several changes to capital gains tax, plus how and when it is paid.

First, lettings relief, which used to apply to anyone who was renting out property they used to live in, is now only available to live-in landlords who are in shared occupation with tenants. The next change is to private residence relief. 

This used to be a percentage reduction of your total capital gains tax bill based on the length of time you lived there plus the final 18 months you rented it.

This additional 18 months has been cut in half to nine months. This is a bit complex and you can find a more detailed description of this above if you need it.

Finally, the amount of time the sellers have to pay capital gains tax has been reduced, falling from by the end of the tax year to within 30 days.

Managing your liability

Understanding your own tax liability will help you to make the most out of your property assets.

As we’ve discussed, you pay tax when buying, letting or selling a property; you become liable for higher tax brackets based on the value of the property and your overall income.

Managing your liability is a matter of knowing exactly what you can and can’t claim as expenses.

While there could be further buy-to-let tax moves, keeping accurate records of your costs, staying abreast of changes and always running your decisions past a property tax expert will leave you on the right side of HMRC.