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Buy to let investment

Landlords and tax

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This page is meant as a brief introduction to the tax position of landlords in this country. Before you enter into a property investment, it is vital to gain expert advice with regards to your own tax position from an accountant or a specialist financial adviser. An accountant is usually the best option. They will be able to advise you more fully on your tax position and any other aspects of your financial affairs that affect your tax liability.

Income tax
UK income tax is payable on the net income from a let property if the property is in the UK . This is the case regardless of the residence or tax status of the landlord. If you continue to live in the UK whilst your property is let, you should declare your rental income in the normal way on your tax return.

Rental income is subject to income tax at the marginal rate. This is the same as the highest rate of tax which applies to you - usually 23% or 40%, depending on whether your total earnings are higher than £28,000 per annum.

Married couples should ensure the most efficient split of letting income between husband and wife, so as to maximise personal allowances and minimise the highest taxable income.

Deductible expenses
The net income on which you are taxed is the gross income less certain expenses incurred in the letting and management of the property. You can set certain things against the rental income for tax purposes. Most business expenses that are invoked through renting out your property, such as legal and professional fees, maintaining or replacing fixtures, furnishings and fittings, and redecorating are classed as deductible expenses.

Only those expenses incurred "wholly and exclusively" for the purpose of letting or managing the property can be offset against your letting income. The most common ones are:

  • Interest on a mortgage or other loan taken out to purchase the let property.
  • Utilities - gas, water, electricity etc - that you as the landlord pay.
  • Buildings and contents insurance.
  • Other insurance such as rental insurance, emergency repair insurance etc
  • Lettings agent and property management charges.
  • Legal and accounting fees.
  • Maintenance and repairs, excluding the cost of improvements.
  • Ground rent and service charges.
  • Council tax paid by the landlord for the property.
  • Unused personal allowances
  • Either: A wear and tear allowance on furniture within the let property of 10% of the annual rent. The annual rent for this purpose is net of any costs which would normally fall on a tenant which you pay instead. The initial cost of furniture cannot be deducted.
  • Or : You can choose not to deduct the annual wear and tear allowance and instead deduct the cost of any replacement furniture purchased. This is a one time only decision that cannot be changed once taken.

Capital gains tax
The sale of an individual's own home is not normally subject to capital gains tax, as it falls under the 'principal private residence' rule. But the 40% capital gains tax would be payable on the sale of a property held for investment purposes such as letting.

The rules regarding capital gains tax are pretty complicated and you should certainly seek advice when calculating it. For instance, where a property has been both a home to the owner and let out to tenants, no tax is payable on the gain during occupation, but full tax is paid on any gains made during the period of tenant occupation. Another point to note is that the tax is only payable by persons who are resident in the UK at any point in the year of disposal.

Residential rent is at present exempt from VAT and is likely to remain so.

Keep records
From 6 April 1996, all taxpayers have been required to keep tax records of all purchases and receipts under the Self-Assessment system. You are required to keep the records for five years.

You should diligently keep a record of all your income and expenditure that relates to you rental property. The records should show to whom payments have been made and from whom income has been received, with receipts kept for all expenditure. Retain invoices for sundry expenses paid, such as rates and ground rate, as well as interest statements from lenders. Also keep invoices for work incurred during or between lettings, and ensure that the nature of the work is clearly stipulated on the invoices.

Finally, use a good inventory. This may avert a dispute with the inland revenue over replacement costs.

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