A Guide to Property Tax for Landlords

Most people purchase a buy-to-let property because they want to make an investment. While the return is likely to be good, either through the money you make in rent or when you sell the property later, it’s important to know that you will need to pay tax at every stage of your investment: when you pay for the property, when you rent out the property, and when you decide to sell it. In this guide, we’ll look at the different types of tax landlords pay and what can be done to minimise the amount.

What Taxes do Landlords Pay?

Unless they are a first time buyer, or the property is below a certain value, everyone is liable to pay a tax, known as stamp duty when purchasing a house. If the property isn’t your primary residence, you are also liable to taxation on the rental profits as part of your income tax, as well as any increase in the value of the property over the time that you own it, which is called capital gains tax.

In England and Northern Ireland, you don’t pay any tax on the first £125,000 of the purchase price of your primary residence. In Scotland the limit is £145,000, and in Wales it is £180,000. However, if you’re purchasing a buy-to-let property in England, you have to pay a 3% tax rate on top if it costs more than £40,000, which rises to 4% in Scotland and Wales.

Income Tax on Rented Property

When you rent your property out to a tenant, you must pay tax on any profit you make from the rental income that isn’t covered by your personal allowance. The current personal allowance, which will stay the same until the 2025-26 tax year, is £12,570.

As well as covering profit made from rent money paid by your tenants, rental income also includes money made from sources such as utility costs, cleaning fees for communal spaces, and parking fees. If you own more than one property you can combine all rental receipts and expenses together, which allows you to claim one property’s expenses against another’s income. The exception to this is any property owned overseas, which will usually be reported separately as foreign income.

As with self-employed people, landlords are entitled to certain tax relief measures in the form of allowable expenses, for example paying letting agent fees. The following expenses can be deducted from a rental income, as long as they were incurred wholly and exclusively from the rental of a property:

  • Insurance, including landlord insurance
  • Property maintenance and repair bills
  • Council tax and water rates
  • Utilities such as gas and electricity
  • Letting agent fees
  • Accountant’s fees
  • Legal fees for lets less than one year old 
  • Legal fees for renewing a lease less than 50 years old
  • Household costs (eg. phone calls, stationary, fees for advertising a property)
  • Vehicle running costs for trips related solely for your rental business

The following expenses cannot be included:

  • The full amount of mortgage repayments on the property
  • Home improvement costs
  • Clothing
  • Personal expenses
  • Private phone calls unrelated to your rental business

Make sure you keep copies of receipts for all of the expenses that you claim. HMRC has the right to demand to see proof of expenses for up to six years after you claim them, so ensure you keep them safe or scan them and store them digitally.

Landlord Mortgage Interest Tax Relief Explained

It used to be the case that landlords used to be able to deduct the interest they paid on mortgage repayments as part of their tax relief. However, since April 2020 this is no longer the case. Instead, landlords receive a tax-credit, which is based on 20% of their mortgage interest payments. This is less generous for higher or additional rate payers than the old system, as the credit only refunds the tax at the basic 20% rate, rather than the top rate of tax that they pay. It may also force some landlords into a higher tax bracket as they need to declare the income that was used to pay the mortgage when filling out their tax return. 

Selling a Property: Capital Gains Tax

When you sell a property that isn’t your primary residence, any increase in value over the time that you have owned it is liable to capital gains tax. The gain is defined as the difference between the purchase price and the sale price and is not the amount of equity you are left with after the sale.

For example, if you bought a flat for £137,000 and sold it six years later for £215,000, you pay tax on the £78,000 difference between the two figures. This means that if you are remortgaging or borrowing more to buy another property, you must leave enough equity in the property to cover the capital gains tax bill in case you need to unexpectedly sell it.

Capital gains tax includes an annual tax-free allowance, just as income tax does, which is currently £12,300. You are also allowed to deduct the costs of selling or improving your property from your gain. These allowances include:

  • Estate agent’s fees
  • Solicitor’s fees
  • Survey costs
  • Stamp duty
  • Costs of improvement works and major renovations

Rates of capital gains tax depend on the tax bracket you are in. For higher or additional rate payers it is charged at 28%. For basic rate payers, your taxable capital gains are added to your taxable income, minus your personal allowance. If the total amount falls into the basic rate income tax band you pay 18% capital gains tax, and any amount above the basic rate will be taxed at 28%.

A capital gains tax return must be submitted, and any tax owed must be paid within 60 days of the sale on the property being completed. 

Letting a Room in Your House Tax-Free

The rent-a-room scheme allows live-in landlords to receive up to £7,500 a year from a lodger before they have to begin paying tax. The landlord doesn’t need to own the property to qualify, but they must have their landlord’s permission to sub-let.

If you do own the property, you must have permission from your mortgage provider to let out a room. If your lodger pays less than £7,500, you are automatically exempt from tax and don’t need to do anything other than keep a record of the income. If you receive more you need to complete a tax return, as is usual for other methods of renting out a property. It may be worth employing the services of an accountant to see which choice will leave you with the most money.

Becoming a landlord can feel overwhelming and confusing due to the sheer amount of details you are required to understand. At Hopewell, our expert letting agents can walk you through the process and give you all the information you need. Get in touch with us today to get started.