Tax Information for BTL Landlords
Posted on 30th December 2020 at 15:38
This post links to a guide for landlords and reviews a range of topics which all landlords need to be aware of.
Recent tax changes for Buy to Let properties have two major implications for landlords. Firstly, landlords need to take account of the changes when completing tax returns. Secondly, profits could be affected.
Since 6 April 2017 claims for mortgage interest have been restricted.
Two changes now rolled into one.
1 Instead of claiming finance costs as a letting expense it will be necessary to claim a deduction which will reduce the tax due on rental properties.
2 There will no longer be any tax relief for higher rate tax payers. The deduction will be limited to a maximum of 20% of the finance costs.
The remaining tapered tax reductions are
2019/20 25% at highest rate of tax and 75% at basic rate
2020/21 0% at highest rate of tax and 100% of basic rate
1 your taxable profit will be higher, so you pay more tax
2 you may pay tax even though you have not net cash after loan and interest payments
3 it will be prudent to review your BTL portfolio in light of the effect on income.
Other claimable expenses
Lighting and heating
Rent and ground rent
Council tax whilst vacant
Repairs and maintenance
Debt collection fees
Letting agent fees
Furniture and fittings
The 10% wear and tear allowance has been removed. It is now only possible to claim for the actual cost of repair or replacement. Keep your receipts!!!
Accruals versus cash
Historically, income and costs were included in rental accounts on an accrued basis. This means in the tax period they were incurred received rather then when they were paid or received. Since 2017 the basis is the "cash" calculation for those with rental income up to £150,000 pa. This is usually easier as it allows for the inclusion of reciepts and payments at the point of the transaction, ignoring any outstanding debts. This makes it handier to keep funds in a seperate bank account.
Repairs versus improvements
Both are allowable costs, but there is an important distinction when claiming tax.
Painting and decoration
Damp or rot treatment
Roof or window repairs
Replacing a roof
Improvements are building work that increases floor area or adding a conservatory, These costs can be set against Capital Gains Tax when selling the property.
Capital Gains Tax
When it comes to sellling an investment property you will have hopefully made some gain in value. You can claim the cost of purchase, selling and improving the property.
Property that was a main residence at some point may qualify for tax relief. You may also qualify for up to £40,000 lettings relief per owner. Advice on whether you qualify and at what rate is best checked with your accountant.
CGT Annual Allowance
There is an annual CGT allowance for each individual owner to offest gains/losses in the year of disposal. All above this is currently taxed at 18% or 28% depending on your tax band.
Furnished Holiday Lets (FHL)
Special rules apply when letting property in the European Economic Area. This may change as of 1st January 2021
Currently property must be
Available to let 210 days per year
Let at a commercial rate for at least 105 days per year
Lets greater than 31 days cannot be included in the 105 days and the total of these lets must be less than 155 days per year.
FHL properties must be shown separately in your accounts.
Stamp Duty (Stamp Duty Land Tax - SDLT)
The rate payable depends on the price of the property and currently includes an additional 3% (all second properties). Companies also pay SDLT on all property purchases.
Differences for Companies
Tax is payable in the form of Corporation Tax, currently 19% on all profits
Further tax may be payable when extracting profits as a salary or dividends.
There is on annual allowance for CGT
Accountancy costs may be greater and there are different Inheritance Tax rules when transferring shares in a property rather than transferring the full title of the property.
What to do next?
When considering your tax position the best route is to talk with a qualified account. Everyone's tax position is different, so it pays to discuss this with an expert. If you need a recommendation we can help.
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