Tax Considerations
These are the major basic tax facts that effect buy-to-let landlords.
Please note that tax is a very complicated subject. Always consult an accountant or tax professional to determine your own tax position.
Income tax
You are liable to pay income tax on the rental income you receive
Tax will be charged at your highest marginal rate of income tax - either 22 per cent or 40 per cent
There are a number of allowances you can offset against income tax
Take your rental income and deduct the following:
1. Interest payments on your buy-to-let mortgage ( but not capital repayments)
2. Mortgage arrangement costs
3. Maintenance costs (such as painting and decorating)
4. 10% a year depreciation of furniture value
5. Cleaning
6. Ground rent, service charges and buildings insurance, where applicable
7. Advertising the property
8. Letting agent's fees
9. Accountant's fees
10. Insurance policies on white goods, gas boilers, plumbing cover
Capital Gains Tax
When you come to sell the property, you will be liable for CGT, but only on the gain you have made
You have a personal CGT allowance of £7,700 a year. If your property is held in joint names with a spouse or partner, you can add your allowances together
Any net taxable gain in the year is added to your total income from other sources in the year to determine the tax band applicable.
If the property was formerly your main residence (ie your home), you are exempt from CGT if you sell within three years of it becoming a rental property
Where a gain is made on disposal of a property that has been a main residence at some point, but has also specifically been let as residential accommodation, then a further special relief is available. This exempts a gain of up to £40,000
If the property was never your main residence, you are liable for full CGT for the first three years. After that the proportion of tax charged is tapered for the next seven years. There is a reduction of 5% after three years increasing by 5% each year to a maximum of 40% of the gain, after 10 years. This equates to effective tax rates for higher tax payers of 24%, and base rate tax payers of 13.8%.
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