Buy To Let Tax News
Neil Simpson is a former Personal Finance Journalist of the Year and the author of the Buy-to-Let Investor column in Financial Mail on Sunday. He is a keen property investor and writes about buy-to-let online as well as for a variety of publications including City AM.
The final three weeks of the tax year are upon us so the financial sections of most newspapers are full of tax-saving tips and strategies. Most involve taking out Isas or topping up our pensions. But making the most of our property portfolios ought to deserve just as much attention.
Property is at once one of the most highly taxed and highly tax efficient investments around. The trick is to avoid the former aspects and take maximum advantage of the latter. Here are some of the tips I’ve picked up recently from accountants, mortgage lenders, estate agents and investors themselves.
Stamp duty is the big, easy-to-forget tax that hits us on the way into the property market. Unless the Chancellor changes things in the Budget this week (which we will update you on afterwards) then we’ll still be paying 1 per cent on prices between £125,000 and £250,000 then 3 per cent up to £500,000 and the eye-watering 4 per cent on anything over half a million pounds. If you invest in an area deemed to be deprived (and possibly ripe for gentrification) then you might pay a little less at the lower end of the market. Check which postcodes get the tax break by looking at www.hmrc.gov.uk and searching under Disadvantaged Areas.
Council tax is one of the hot tax topics of the moment – and landlords groups tell me they are constantly surprised at the number of first-time landlords who pay the tax for their tenants. It is mainly the ‘accidental landlords’ who rent out their former homes who make the mistake. But it’s standard practice in the rental market that tenants pay their own bills so you can save a lot of cash by passing over the responsibility. If the tenancy agreement you signed with your tenants states that you will pay the tax then you can’t change things until this expires. But the good news is that when a new agreement comes into force you can soften the tax blow for your tenants by saying you will keep the rent the same. In most cases this will still leave you better off, while making your tenants feel they have saved some money as well.
Income tax is the other big story of the moment – HM Revenue & Customs has just launched a newspaper advertising campaign reminding people who rent out property that they should be declaring their income. So don’t expect it to be particularly forgiving to anyone who doesn’t play ball. Fortunately there are so many tax breaks on offer to landlords that income tax bills can be cut right down. Take a look at the guidance notes under the Land & Property parts of the self-assessment tax forms for more information.
This is the form you need to complete as a landlord and you can see it online at www.hmrc.gov.uk under Self-Assessment. The big plus is that the mortgage interest you pay is an allowable expense. So if you collect £10,800 a year in rent and pay out £7,200 a year in mortgage interest HM R&C is only interested in the £3,600 difference for tax purposes. Of course even this figure can shrink dramatically when all your other allowable expenses are taken into account. They include everything from insurance and maintenance costs, water bills, wear and tear and service charges.
Ask a group of landlords which tax bothers them the most and you’ll probably get one clear answer: Capital gains tax. CGT can take up to 40 per cent of any profits you make when you sell your investment and appears to be a major drag on the profitability of the sector. But experienced landlords say the tax might not always be as tough as it appears.
Once more there are several allowances and tax breaks which can eat away at the final bill - if you buy a property for £90,000 and sell it for £190,000 you certainly won’t have your tax take deducted from the £100,000 difference. If you are one of the accidental landlords who are renting out your former home you get especially generous benefits, though it may feel as if you need a degree in maths to understand them. Landlord forums and online discussion boards are good places to look for tips about capital gains tax. And most landlords say the money they invest in an experienced accountant was well spent.
Stealth taxes are the final set of charges every landlords needs to watch out for. Many aren’t taxes as such. But they can all tip a profitable investment into the red if you don’t pay enough attention to them. And it seems they are getting more numerous. A key example are the new licensing rules for houses in multiple occupation, HMOs, which were introduced last year. The price of these licences varies widely across the country, from £150 with a low cost local authority to more than £1,500 with the exact opposite, according to many investors.
The idea behind the licences is to upgrade the housing stock and ensure tenants aren’t forced into sub-standard accommodation. It’s a laudable aim. But deep down everyone knows it’s just a tax by another name. It is, though, a bill you shouldn’t ignore. The maximum penalty for renting out an HMO without a licence is £20,000 – to find out more go to www.communities.gov.uk and search under HMO.
The new rules on tenants’ deposits follow a similar theme. The idea is to cut out one of the biggest causes of landlord/tenant disputes by ensuring that deposits cannot go missing and will be returned according to a clearly defined set of rules. But landlords who don’t pay attention to the requirements and don’t sign up to a scheme can be hit with a bill for up to three times the amount of the deposit. You can get more details at www.direct.gov.uk by searching under tenancy deposits.
