Property tax can be a complicated business, especially for individuals new to property tax. Alongside the numerous other matters you’ll have on your plate, getting your property ready to let out, choosing the right tenant for you, and most of all, deciding how to spend your new source of income, tax can often be the thing left on the backburner.
Getting on top of understanding allowable expenses, stamp duty, income or corporation tax liabilities and the implications of capital gains tax when you sell the property on the future, can go a long way in navigating the minefield of property tax. That’s where CMA comes in. As far as we are able to do, we will guide you through all to know about the taxes you’ll pay as a landlord.
You pay tax throughout the lifecycle of owning a second property. You are eligible to pay stamp duty if you buy a property over a certain price in the UK. The Chancellor, Rishi Sunak announced in the 3 March Budget that the holiday on stamp duty will be extended until the end of June 2021. The stamp duty holiday does apply to second homes, will the main driving force behind the change being to stimulate the property market back to life following the coronavirus pandemic.
Under the current scheme, buyers do not have to pay stamp duty on the value of a property up to £500,000, rather than £125,000. It allows people to save up to £15,000 in taxes when purchasing a home. After 31 June, the value of a property buyers do not have to pay stamp duty on will be reduced to £250,000 – still double the usual rate. It will return to its normal £125,000 threshold from 1 October.
Buy-to-let landlords and second home buyers are eligible for the tax cut.
However, they still have to pay the additional 3% rate that has always been in place for second home buyers. You will not have to pay the three per cent tax if the property you’re buying is replacing your main residence and that has already been sold.
Tax is paid on the profit made after accounting for your rental receipts, less your allowable expenses and any losses brought forward from a previous. The tax is charged as either income tax or corporation tax depending on if the property is let by an individual or a company.
If the letting is deemed a business (e.g. furnished holiday lets) then payment is made in three instalments by an individual at the landlord’s marginal tax rate. The first two payments are as advanced ‘Payments on account’ (POA) towards the tax years’ final tax bill. Each payment is half of the previous year’s tax bill payable by 31 January in the year of assessment and the 31 July after. When the final accounts are known these payments are deducted from the final amount and any balance is payable on 31 January after the tax year.
So how do you reduce the amount of income tax you will have to pay on your rental property income? It is key to have a sound understanding of when is classed as an ‘allowable expense’ when working out your taxable profit. Remembering to keep track of all of your expenses can ensure they don’t get overlooked. Below is a list of the most common expenses associated with property rental:
- General maintenance and repairs to the property (but not improvements)
- Water rates
- Council tax
- Gas and electricity
- Insurance (such as landlord’s insurance for buildings and landlord’s contents)
- Cleaning costs
- Gardening costs
- Letting agents’ fees
- Property management fees
- Accountancy fees
- Office costs, such as stationery, paper, printing and postage
- Advertising costs
- Telephone bills (for calls related to the rental property)
Capital Gains Tax (CGT):
CGT is charged on the net gains (sales proceeds less costs) made on the sale of assets by individuals. Note that Companies do not pay CGT, rather they are charged to corporation tax on the net gains at 19%.
If the overall gains made on sales of property during a tax year exceeds the annual exempt amount (£12,300 for 2021/22), the balance is taxed at the landlord’s highest rate of tax applicable to capital gains (i.e. 18% for residential property on any amount falling within the basic rate band and 28% for the higher rate bands).
Non- residential (commercial) property gains are taxed at 10% if within the basic rate band and 20% otherwise.
You may have heard of ‘lettings relief’. This was a reduction in capital gains tax for landlords who lived in the properties they let out. From April 2020, lettings relief is only available for live-in landlords who are in shared occupation with their tenants. You may still qualify for private residence relief, however. This is a reduction in capital gains tax, based on the number of years you lived in a property plus the last nine months before you sold it.
For instance, if you live in a property for 3 years and then let it out for 10, you would be eligible for private residence relief for the 3 years you live there, plus the last 9 months you rented it out. 3 years and 9 months equals 28.8% of the time you owned the property for, and therefore you would gain private residence relief of 28.8% of the gain made when you sell the property.
Changes to the way that UK residents report capital gains tax are now in effect, with individuals now required to report and pay the necessary tax within 30 days. Previously they were able to wait until the end of the tax year passed, and report this via their annual self-assessment return.
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