One of the most important considerations when investing in buy-to-let property is what tax you are obligated to pay, and to whom you have to pay it.
Buy-to-let taxes can be complicated, but as long as you are fully aware of your obligations then it should not be an off-putting part of the investment process. Here are the different taxes associated with being a landlord:
The Government defines Stamp Duty Land Tax (SDLT) in the following way: “You must pay SDLT if you buy a property or land over a certain price in England, Wales and Northern Ireland.” The tax is payable when you:
We have covered SDLT more thoroughly, including the different taxation tiers, here.
Any money that you earn on a regular basis as a landlord needs to be declared to HMRC. Rental income is taxed in exactly the same way as your salary and the best way to avoid confusion is to file your documents through an accountant. Rental income is added to any other income you earn during the year – for example, from employment or savings – to calculate your tax liability. You must declare this income on a Self-Assessment tax return each year. However, you can claim certain expenses to offset against your rental income and reduce your tax bill.
This includes, for example, mortgage interest payments if you have a buy-to-let mortgage, letting agent fees and some property maintenance costs. From April 2017, the higher and additional rates of relief will be phased out and restricted to 20% for all landlords by April 2020.
More detailed advice on Income Tax and buy-to-let property investment can be found here.
Capital Gains Tax
If you sell a property that isn’t your main home then the profit from the sale will be taxed and you must declare your interests to HMRC in order to avoid any confusion. Once again, it is usually advisable to approach a qualified accountant to assist you with these matters. You can offset expenses of a capital nature, such as replacement windows, against capital gains tax when the property is sold. As this may be many years after the works it is important that you keep records and evidence of any such expenditure and then. when you come to sell your property, check with a financial adviser or accountant what you can claim back.
Inheritance tax is the amount paid to HMRC upon the passing of a person’s estate, or total net worth, onto a benefactor. This applies for lump sums of money, pensions, possessions and property.
If you are single and die during the tax year 2016-2017 with an estate worth more than £325,000 (including money, property and investments, but after deducting debts and expenses such as funeral costs), 40% tax will become due on anything above £325,000.For example, if you leave behind an estate worth £500,000, the tax bill will be £70,000 (40% on £175,000 – the difference between £500,000 and £325,000). However, if you are married or in a civil partnership, you may be able to leave more than this before paying tax.
Married couples and civil partners are allowed to pass their possessions and assets to each other tax-free, and the surviving partner is allowed to use both tax-free allowances (providing one wasn’t used at the first death). At the extreme, this effectively doubles the amount the surviving partner can leave behind tax-free without the need for special tax planning. However, some people whose partner died before 21 March 1972 will be caught by a loophole which means they don’t get a ‘double allowance’. As well as on your estate at death, inheritance tax may also be payable on gifts you make during your lifetime, especially if you die within seven years of making the gift.
Gifts fall into four basic categories:
Who pays the inheritance tax bill?
Inheritance tax that becomes due on money or possessions passed on when you die is usually paid from your estate - everything you owned, minus debts and expenses such as funeral costs.
However, if the tax is due on gifts you made during the last seven years before your death, the people who received the gifts must pay the tax due. If they cannot or will not pay, the amount due then comes out of your estate. As with any taxation there are some certainties and some variables. The key to avoiding confusion and surprises is firstly to prepare properly for a tax bill and secondly to seek the correct qualified advice. It is always advisable to instruct a reputable accountant or tax adviser to provide you with the best information possible, but this is situation dependent and you should follow the path best suited to your needs.