Thank you to Cheryl Price from CH Accountancy for this fantastic guest blog about tax for landlords. Cheryl and her team are based in Ford End, Essex and are fast building a reputation for their great service. This week, Cheryl shares her expertise on tax for landlords…enjoy!
Do Landlords need to file a tax return? The short answer is YES!
Whether you only have one property that you rent out and you barely earn any profit, or you have 100 properties and this is your sole income, you still need to register with HMRC and file a tax return.
When you start to rent your property you need to register with HMRC for self assessment. This can be done online, and will only take a couple of minutes using this form: https://online.hmrc.gov.uk/shortforms/form/SA1?dept-name=&sub-dept-name=&location=43&origin=http://www.hmrc.gov.uk
Tick the box for ‘I’m getting income from Land and Property in the UK’, and use the date your first tenant moves in.
Currently landlords are required to file a self assessment tax return each year. The return is due by the 31st January following the end of the tax year via the Government Gateway (or 31st October if filing via a paper form). For ease, the simplest way to set your financial year is the 1st April – 31st March so it more or less coincides with the tax year (when using software you will see they only work on a full month basis,) your first tax return will cover the period from when you first start renting your property until the 31st March.
If you are also employed, you will also need to include your employment income and you will need your P60 (and P11D for any benefits) from your employer to complete your tax return. These should be given to you by:
- P60 – by the 31st May following the end of the tax year
- P11D – by the 6th June following the end of the tax year
Any savings/bank interest received, dividends from shares etc will also need to be included, and if you receive Child Benefit and your rental income takes you over the threshold into the higher tax bracket you will also need to declare your Child Benefit.
From the 1st April 2018 HMRC are bringing in Making Tax Digital. This will affect landlords with income over £10,000 each year. HMRC are still to announce the full details, but we do know that each tax payer will need to submit a summary of their data to HMRC each quarter, with a final year end return to be filed 9 months after the end of the tax year, confirming final figures for the year. Each return will need to be submitted via software. Sign up to our newsletter to receive details of further developments (http://eepurl.com/3ISdb).
What Expenses can I claim?
There are a number of expenses you can claim as an expense, including:
- Council tax, insurance, ground rents etc
- Property repairs and maintenance – however large improvements such as extensions etc will not be income tax deductible. They will be added to the cost of the property when it is sold and be deductible against any capital gain (Capital Expenses)
- Legal, management and other professional fees such as letting agency fees.
- Other property expenses including buildings insurance premiums, gas safety certificate etc.
Can I claim my mortgage interest as an expense?
Currently Landlords are able to claim the full amount of interest paid on their buy to let mortgage as an expense, however the Summer 2015 budget introduced changes to this. These changes will start to take effect from April 17, for the 17/18 tax year, and are being phased in over the next few years.
Under the new rules mortgage interest will not be included in your expenses, but you will still be able to claim relief of 20% of the interest you pay.
This means that your taxable income will now increase, although if you then remain in the Basic Rate tax bracket you will not actually pay any more tax. For example (ignoring any other expenses) – currently if your rental income is £15,000 per year, and your mortgage interest was £10,000, then your taxable income would be £5,000 for the year, and you would pay 20% tax on this.
However, under the new rules, your income would be the full £15,000. This may not sound a problem, however if you have multiple properties, or employment income as well, adding these together could take you over the threshold and into the Higher Rate bracket.
This increase could also affect claims for Child Benefit and Income Tax Credits. The only good thing is that the higher rate bracket will have risen to £50,000 before the changes take full effect in 2020.
Here are a couple of examples, so you can see how it will affect you:
Basic Rate Taxpayers
Higher Rate Taxpayers
As you can see, the Basic Rate taxpayers will only be affected if the increased income pushes them into the Higher Rate band, however if you are a Higher Rate taxpayer, the tax you pay will unfortunately increase.
What happens when I sell my property?
When you sell your property you will be liable for Capital Gains Tax on the profit you make. This is where your capital expenses I mentioned earlier come into play. To work out your profit you deduct the costs from when you bought the property (stamp duty, solicitors fees etc), fees from selling your property (solicitors fees, estate agent fees etc) plus any capital expenses throughout ownership of the property (renovations etc) from the sale proceeds, along with the original cost of your property. The remaining profit is your Capital Gain. As an individual you get an annual allowance to offset against this gain (for 16/17 it is £11,100) and you will need to pay tax at a rate of either 18% or 28% on the remaining profit, depending on your income level.
If the property was previously your main residence then your gain will be reduced, and will be dependant on how long you have rented the property.
The gain will need to be declared on your tax return for the year you sell your property.
It may be worth noting that if you joint own the property with your spouse or another person then the profits will be shared equally and you will both benefit from the annual allowance. Another point to note is if you have more than one property and intend to sell them both/all, it would be prudent to sell each property in different tax years to minimize your capital gain – spread it over a number of years and take advantage of the annual allowance rather than one lump sum in one tax year.
Is using a limited company better for tax?
Unfortunately, there is no simple answer to this question. It will depend on a number of factors such as how many properties you hold, whether you need the income quickly and how long you want to hold the properties for and your individual circumstances.
Limited companies are not affected by the new Mortgage interest relief restriction coming in from April 2017. Interest for limited companies is classed as a business expense and fully deductible against income.
Companies pay corporation tax at a fixed rate irrespective of the size of the profits. The Corporation Tax rate is currently at 20% reducing to 17% in 2020. This makes the tax rate very attractive compared to 40% for higher rate taxpayers and 45% for additional higher rate taxpayers.
The question is how the money in the company is passed to the individual. If the money is taken out of the company as a dividend, then from April 2016 only the first £5,000 of dividend income is tax free. Any dividends taken out in excess of this will either be charged at 7.5% for a basic rate taxpayer 32.5% for a higher rate taxpayer or 38.1% for an additional higher rate taxpayer. This tax is after the corporation tax at 20% has been paid.
The money could be taken as a salary, however the company would have to operate PAYE and pay Employers National insurance contributions on any salaries paid. This usually in most circumstances works out more expensive than paying dividends.
Companies do also not benefit from the annual allowance of £11,100 against capital gains. So extracting the money for a sold buy to let property could be less tax efficient than holding the property as an individual.
As you have to pay the 20% corporation tax on any gain, no annual allowance is given and you have to pay tax on extracting the money from the company, whereas even a higher rate taxpayer only pays 28% on any gain from the sale of a buy to let as an individual. Companies also have to prepare accounts to be filed with company’s house, prepare and file corporation tax returns, which can be more onerous than self-assessment returns.
Interest rates charged on mortgages to companies have historically been higher than to individuals so further investigation of the comparison of the rates charged should be considered alongside the tax implications.
Transferring a current buy to let property into a limited company can trigger stamp duty and capital gains tax charges at the time of transfer so advice should be sought before undertaking such a transaction. Due to the complexities of this area it is essential that you seek proper professional advice.
Do you pay inheritance tax on a buy to let property?
Yes, Inheritance Tax is payable on buy to let properties but the amount changes depending on your circumstances.
A buy to let property that you own will form part of your estate for Inheritance Tax purposes.
It works like this:
If you’re operating as a sole landlord – with the buy to let mortgage in your name, as an individual and your estate entirely owned by you alone – then you’re liable to inheritance tax if your property value less any outstanding mortgage (or combined value of your estate) exceeds £325,000.
If you’re in this with a married or civil partner, then you each have a threshold of £325,000 so the inheritance tax kicks in at £650,000.
Anything above these amounts is taxed at 40%.
Inheritance tax planning is complex and definitely something that should be discussed with an expert tax or financial adviser.
The information provided here is generalised. Please see an accountant for specific advice relating to you and your personal circumstances.
Rates given are for the 16/17 tax year.