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Buy To Let Tax News

Landlords advised to check tax payments

Landlords have been warned to make sure they are paying the correct tax ahead of a crackdown by HM Revenue & Customs (HMRC).

The body said that it was launching a new trade and national advertising campaign advising landlords who let a room in their home or run a business, of the need to declare earnings and pay tax on any profit.

Landlords who let multiple properties could be considered to be running a business, HMRC advised, and should go to the body's website to check if they need to pay tax.

"The guidelines and advice on the website are not complicated, and information is just a click away," said HMRC director of risk and intelligence Stuart Hartlib.

However, some accountants are concerned that landlords who have innocently failed to pay tax could face inquiries, prosecutions and fines.

Accountant at PricewaterhouseCoopers John Whiting told the Times: "There is widespread confusion about how both income and capital-gains tax (CGT) apply to buy-to-lets, as shown by the latest crackdown.

"Many people we see do not realise that tax on property needs to be declared."


The Inland Revenue considers rental income in a similar way to salary, and is therefore taxed at 22% or even 40%. However, landlords can deduct costs from the taxable portion of their rental income, and these costs can include the interest portion of their Buy To Let mortgage repayments as well as maintenance costs on the property. The Inland Revenue also has a generous 10% Wear and Tear allowance if you let your property on a furnished basis as opposed to an unfurnished basis.

Considerations in more depth

Buy To Let tax implications are very complicated and whilst we will try and give an overview you cannot rely on our information because we are not qualified accountants.

Income Tax is payable on rental income at your marginal rate, either 22% or 40%.

Possible buy to let tax deductions

×  Furnished Property

If you furnish your buy to let property with used or new furnishings you can claim:-
Either a Wear and Tear allowance equal to 10% of gross rents (subject to the tenant paying the utility bills).
Or renewals allowance i.e. The cost of renewing the furnishings as and when required as long as you don’t claim in the first year.

×  Professional fees

Fees associated with the property i.e. Letting Agent management fees, Solicitor’s conveyance fees, accountant’s fees.

×  Mortgage Fees

Interest payments on the mortgage associated with the purchase of the property, along with mortgage arrangement costs and landlords insurance.

×  Maintenance Costs

Painting, decorating, gardening, cleaning and gas checks are prime examples of allowable maintenance costs BUT make sure you are not claiming for works that IMPROVE the property instead of MAINTAIN the property. Also include insurances taken out on appliances such as boilers, washing machines, driers, cookers.

×  Marketing

If you manage your own buy to let properties then consider the costs of marketing the property to let.

×  Costs relating to Flats

Flats within blocks tend to have other costs such as service charges and ground rent.

Capital Gains Tax

If you decide to sell your buy to let property you will be liable for Capital Gains Tax. Only the gain will be subject to the tax not the whole selling price. At the time of writing the Capital Gains Tax allowance was £7,700 a year for a single owner and £15400 for joint owners.

After applying the stated allowance(s) the net figure (gain) is added to your total income for the year that the buy to let property was sold. In reality it means its added to your total income before determining your tax band and how much tax to pay.

A good point to remember is that if the buy to let property was formerly a main residence you may be able to get relief. You could even be exempt if you sell within three years of the property becoming a rental property.

Unfortunately, if you buy the property solely for investment purposes then you will be liable for full Capital Gains Tax. A taper relief does apply i.e. The along you hold the property the less tax you pay:-

After year three the taper relief is 5%. Every year thereafter the relief increases by 5% up to a maximum of 40% at year 10.

Stamp Duty

Unfortunately the Government put a stop to Fixtures and Fittings being exempt from stamp duty, however ‘chattels’ are still exempt. Chattels are defined as moveable items such as carpets and curtains.

Designated Disadvantaged Areas are widespread and such areas are free from Stamp Duty but only if the buy to let property is sold for less than £151,000.

If you contract to buying an off plan buy to let property and you then sell on the contract prior to obtaining keys then you will be exempt from paying stamp duty.

Buying Commercial Property does not create a need to pay stamp duty.

The landlord must also be aware that if he does a deal with another landlord to buy several properties then it would probably be deemed a link transaction. Link transaction can create a further Stamp Duty liability.

The missing £6 billion property boom.

By Neil Simpson

Well, so much for the £6 billion buy-to-let boom of 2006. That is how much estate agent FPD Savills had been predicting investors would spend on property after April 6 if tax rules had allowed buy-to-lets and holiday homes to be held in pensions for the first time.

But as it turned out Gordon Brown knocked all the speculation on the head in his pre-Budget statement in December. He said residential property wouldn’t, after all, be allowed to go into Self Invested Personal Pensions or Sipps – and neither would any other exotic new investments such as fine wines, classic cars and works of art. It was a change of heart that caught out big companies and small investors alike. Standard Life, for example, had launched a Sipp in December 2004 to make sure it was ready for the rule change and was soon attracting more than £100 million a month of new money. The company passed the £1billion mark by the late summer of 2005 when around 300 new customers a week were signing up for plans. The Sipp’s success was ‘beyond our wildest expectations’ said Trevor Matthews, chief executive of the company’s life and pensions business. And Standard Life wasn’t alone. More than 40 other providers were rushing to offer Sips and getting overwhelmed by interest – and money – from hopeful property investors ready for a spring time buying spree.

The question now is what will happen to all this money – and what effect it will have on the buy-to-let market.

Theory One.

The first knee-jerk reaction to the Chancellor’s U-turn is that the property market could now be in for a big hit in 2007. Pessimists said that the new money was vital to underpin an uncertain market and keep buy-to-let a valid investment. But in reality I always argued that far less than the predicted £6 billion was ever going to be spent on property in the first place. Sipps have always been far more expensive and complicated than most people realised – buying a property through one was never going to be a mainstream activity and many of the first-time Sipp buyers were going to give up before turning their new fund into bricks and mortar.

Theory Two.

As the dust settles on the change of rules there is a chance that it could actually add some stability to the market. People who had been gearing up to buy property through a Sipp may now be released from the complexities of the pension plan and start to focus on the property itself – which is what all investors should have been doing to start with. If a buy-to-let had looked like a good investment before the U-turn, then hopefully it will still look like one afterwards as well. So some of the hopeful Sipp investors may join the buy-to-let world in the normal way – and stick with it for the long term. Freed up from the constraints of the Sipp, it may even be possible for many of these investors to buy sooner than they would have done, which could also be good news for the market.

The conclusion.

As ever the lesson from this bizarre investment interlude is to avoid letting decisions about tax cloud your judgement. Being a successful landlord is about far more than earning a tax break from the HM Revenue. Finally it is worth remembering that you don’t need a Sipp to turn a property into a pension. Countless people – myself included – own properties that we hope to use as cash generators in retirement. And no U-turn from the Chancellor can change that.
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