Property taxes can be complicated, especially for new landlords. A number of activities happen when you start getting your property ready for rent and it can be easy to forget about tax.
This guide will take you through what you need to know and do about capital gains tax, stamp duty, corporation tax and expenses, whilst clarifying key terms and giving you the most up to date information about all things tax for 2021.
The main topics that are covered in this guide are:
What taxes do landlords pay?
There are three key moments to think about in the property tax lifecycle – when buying a property, every year you let the property, and later when you sell it.
When you buy property – stamp duty
If you buy a property over a certain price in the UK, you are eligible to pay tax. This tax amount is specific to the value of the property you purchase and depends on the location and circumstances.
Individuals pay Stamp Duty Land Tax (SDLT) on residential properties worth £125,000 or more, and on non-residential properties or land worth £150,000 or more. When you complete the purchase of your new property, you are required to send a SDLT return to HMRC and pay this within 14 days. Your solicitor, agent or conveyancer can do this on your behalf if you have one, or you can file the return and pay the tax yourself. These rules apply to England and Northern Ireland, there are different rules for Scotland and Wales.
If you are buying for the first time, the thresholds for paying stamp duty are generally higher, so you may not have to pay. If you’re buying to let, stamp duty rates are tiered and start at a lower value than those for other home buyers.
There are temporary arrangements in place for stamp duty, with regards to the current stamp duty holiday but there is expected to be a return to the levels below post-pandemic.
In England, the rates for buy to let landlords are:
|Property Price||Buy to let stamp duty rate|
|Up to £500,000||3 percent|
|£500,001 - £925,000||8 percent|
|£925,001 - £1.5m||13 percent|
|Over £1.5m||15 percent|
While you’re letting property – income tax
Depending on your total income when letting a property, you may have to complete a self-assessment tax return.
The rate of income tax you pay varies by income. For 2021, the personal allowance is set at £12,570. This means you pay the basic rate of 20% of your income up to and including £37,700, and if you make between £37,700 and £50,000 you pay 40%. If you make more than £150,000 you pay the additional rate of 45%.
As a landlord, you’re entitled to a £1,000 tax-free property allowance. If you are self-employed as a landlord, and you file a self-assessment tax return you’re also entitled to a £1,000 tax-free trading allowance.
If you make between £1,000 and £2,500 a year from letting property, you must make HMRC aware of this in order to pay tax. If you make less than £1,000 a year from letting property, you don’t need to tell HMRC. If you make between £2,500 and £9,999 after allowable expenses, or over £10,000 before allowable expenses, you will need to make a self-assessment tax return and may have to pay income tax.
If you’re filling out a paper form to make your self-assessment tax return, you must do this by the 31st October each year. If you’re returning your self-assessment tax return online, you must do so by 31st January each year.
You may also have to pay class 2 National Insurance, if you’re running a business and:
- You make more than £6,475 a year from letting property
- Being a landlord is your main job
- You rent out more than one property
- You’re buying new properties to let out
When you sell your property
capital gains tax
When you sell a property that’s not your home and make a profit, you might be liable to pay capital gains tax.
From 6th April 2020, the annual exempt amount for individuals and personal representatives increased from £12,000 to £12,300. HMRC provides a tax calculator for working out how much capital gains tax you have to pay, if any. The calculation takes into account the market value of your property, minus any estate agents fees, solicitors fees, and the costs of major improvement works.
The level of capital gains tax differs for basic rate taxpayers, but it is currently set at 28% for higher and additional rate taxpayers.
UK residents will now have to pay within 30 days of completing the sale. Lettings Relief is a reduction in capital gains tax for landlords who live in the properties they let out and from April 2020, it is only available for live-in landlords who are in shared occupation with their tenants.
If that doesn’t apply to you, you may still qualify for private residence relief, which is a percentage 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.
Corporation tax vs. income and capital gains tax
Businesses are taxed differently from individual taxpayers, instead of income and capital gains tax they pay corporate tax.
If you choose to do a business as a limited company, you may have to register for corporation tax, file a corporation tax return and either pay corporation tax or report that you have none to pay.
Tax effective property ownership
Who pays property tax?
The individual/s that benefit from owning a property are the ones that pay the tax.
What about landlords with more than one property?
When landlords have multiple properties, tax liabilities are considered the same as when running any other business. All rents and expenses from similar properties are grouped together into a single figure, the groups are outlined below:
1. UK rentals – any buy to let or shared rented house on a short hold tenancy
2. Overseas rentals – any properties abroad let on a long lease
3. Holiday lets – homes located within the European Economic Area that qualify as furnished holiday lets.
What happens if a landlord makes a loss?
If your expenses come to more than your rental income during a year, this means you have made a loss, such loss is carried forward to offset against future rental profits.
You cannot avoid tax by storing up your losses to use when it suits you, you must offset losses against available profits each year, until they are used.
Expenses – what you can and can’t claim
As a landlord, you should claim property expenses. Every pound spent on a property reduces profits, which reduces your income resulting in the reduction of tax liability. Self-employed individuals are entitled to a £1,000 tax-free property allowance, and another £1,000 tax-free trading allowance. If you were to claim the £1,000 tax free trading allowance you are then unable to claim any business expenses.
You are only able to claim tax-free trading allowance if your total income from letting property is between £1,000 and £2,000 a year.
What are self-employed landlords allowed to claim as income tax-expenses?
You can find the latest allowable income tax expenses for landlords here. It is important to remember that any claims you make are different on whether you’re letting a residential property, a furnished holiday let or a commercial property. Residential landlords can claim for the day-to-day expenses of running their properties including:
- Bad debts
- Business costs (phone calls, travel and running a home office)
- Fees for services by professionals (accountants, letting agents, solicitors or surveyors)
- Ground rent on the property
- Insurance cover including for buildings, contents and rent guarantee
- Interest on loans and credit purchases
- Repairs to and replacements for the property
- Services like cleaning or gardening
- Utility bills and council tax (while the property is unoccupied)
For a property business, rent arrears are the most likely cause of bad debt and as a landlord, you must make reasonable effort to recover the money, like launching court proceedings or passing the case to a debt collector.
HMRC publishes guidance on allowable expenses for self-employed people. These include:
- Office, property and equipment
- Car, van and travel expenses
- Clothing expenses
- Staff expenses
- Reselling goods
- Legal and financial costs
- Marketing, entertainment and subscriptions
- Training courses
A self-employed landlord can claim some of these, the costs of travel with your own vehicle and working from home, using ‘simplified expenses’. Simplified expenses use a flat rate for these costs to avoid complicated calculations.
In terms of simplified expenses, there are specific parts to think about as a landlord.
1. Travel expenses: you are not allowed to claim on regular and predictable travel between your home and your place for work. You can claim for travelling to view new properties, but only if you end up buying the property.
2. Staff expenses: If they’re doing work related to running the property, you can pay friends, family and employees who do not own a share of your property. You can also pay for training as long as you’re reinforcing existing skills.
It is important to know that you can’t use simplified expenses if you’re running your properties through a limited company.
Fees for professionals
These are bills from accountants, agents, solicitors and surveyors.
Other costs include, the day-to-day running of the business including chasing bad debts, evicting tenants in rent arrears and keeping financial records are allowed. Costs that are not allowed include costs that are related to buying, selling and planning applications.
Landlords now receive a 20% tax credit on interest payments (interest relating to borrowing to fund business costs such as buying land, property, supplies or refurbishments). You can’t claim the actual cash amount, you can only claim interest and you must be able to prove that the borrowed money was spent on buying land, property, or equipment for the property business or funding repairs and improvements.
Repairs and replacements
You can’t claim improvements as expenses for income tax purposes. You can claim replacement of domestic items relief for things including:
- Movable furniture (beds and free-standing wardrobes)
- Furnishings (curtains, linens, carpets, floor coverings)
- Household appliances (televisions, fridges, freezers)
- Kitchenware (crockery and cutlery)
In order to claim this relief, you must have bought the item for the property and removed the old one. Two things you can’t claim for are the initial cost of fitting out a residential property for rental and the costs for upgrading the item.
Extra tax savings for married couples
Tax rules concerning married couples are complicated but can enable people to shift their assets between each other in a legal and above-board way to reduce the tax bill. Below outlines the ways in which couples can do this but we recommend speaking to a tax professional who will be able to review your situation fully.
If one of you doesn’t pay income tax
Marriage Allowance is allowable to couples where one person earns less than the personal allowance (currently £12,570) and the other person pays income tax at the basic rate (usually when someone’s income is between £12,570 and £50,000).
The marriage tax allowance is currently £1,250, meaning the potential tax savings from the higher tax earners bill is up to £250. To benefit from this, you must be married to someone who doesn’t pay income tax or whose income is below £12,570. The person with the lowest income needs to claim marriage allowance online and it can take two months to process the claim. The person who has the higher income will get their new personal allowance when they send in their next self-assessment tax return.
If you both pay income tax
If you’re both basic rate taxpayers, one option is to set up a business partnership. Business partners share responsibility for any losses the business makes, any bills incurred, and profits, but each partner only pays tax on their share. Setting up a partnership means you can avoid one person moving into the higher rate for income tax.
To do this, you will need to choose a name for your business and choose a nominated partner who will be responsible for filing the tax return. This nominated partner must register for partnership with HMRC.
Setting up a limited liability partnership is a good idea as partners in a limited liability partnership aren’t personally liable for debts the business can’t pay, keeping you safer if future business struggles were to occur.
Paying higher rate income tax
Private limited companies are legally separate from the people who run them, have separate finances from the people who run them and can keep any profits they make after paying corporation tax.
The advantage of a private limited company is that you can pay yourself a salary within the basic rate of income tax, and have your partner claim Marriage Allowance, or pay your partner a separate salary. The rest of your profits will be paid as dividends to people with a share in the company. Shares can also be bought, sold and transferred if you want to bring more members of your family into the company. It’s a way to make sure you don’t end up paying income tax at the higher rate.
The disadvantage is that it takes more work to set up a private limited company than a partnership.
You’ll need to choose a company name and registered address, appoint directors and a company secretary, establish and issue at least one share, and draw up a memorandum and articles of association which set the rules for running the company. It’s only normally worthwhile if you have several properties or a substantial annual rental income.
Who pays council tax on a rented property?
In most cases, the tenant will be responsible for paying the council tax though there are some exceptions including-
1. Houses in multiple occupation
2. If the tenants are under 18 years of age
3. If the tenants are renting short-term in an emergency situation
4. If the tenants are asylum seekers
New tax changes for 2021
- A continuation of the Stamp Duty Holiday until June 30, 2021, on all property purchases up to £500,000. In addition, there will be no Stamp Duty charged on residential properties bought for up to £250,000 until the September 30, 2021. Investors will still be liable to pay stamp duty as per the current rates.
- Capital gains tax – The Office for Tax Simplification (OTS) has recommended raising capital gains tax to be brought in line with income tax. On the sale of second homes, the rates are currently 18 per cent for basic rate taxpayers and 28 per cent for higher rate taxpayers. The OTS recommendations, if implemented, would see the tax rate on capital gains tax for buy to let properties increase to 20 per cent for basic rate taxpayers. The rate for higher rate taxpayers would increase to 40 per cent. The OTS’ proposals would also have an impact on the amount available for inheritance. Please note that these are currently only proposals, but are likely to come into force so it’s important to be prepared.
- As of April 2nd 2021, non-UK residents who wish to purchase a property in England and Northern Ireland and will now have to pay a 2% stamp duty surcharge. This applies to all residential acquisitions and on rents on the ground of a new lease.
New buy to let changes for 2021/2022
A range of new changes were introduced in the 2020 tax year for landlords including interest tax relief, capital gains tax allowance and changes to how capital gains tax is paid on rental properties you used to live in.
Mortgage interest tax relief
Landlords are now given 20% tax credit for all property finance costs. The aim of the policy is to increase the amount of tax paid by higher or additional rate landlords, who used to receive generous tax deductions. Basic rate tax-payers should end up paying more or less the same as before.
Capital gains tax allowance increase
There have been several changes made to capital gains tax.
- Lettings relief is now only available to live-in landlords who are in shared occupation with tenants.
- Private residence relief which was a percentage reduction of your total capital gains tax bill based on the length of time you live there plus the final 18 months you rented it. These additional 18 months has been cut to 9 months.
- The amount of time sellers have to pay capital gains tax has been reduced to within 30 days.
Please bear in mind that this guide is a general overview of the current tax landscape. If you need further detail and clarification, we recommend seeking professional advice from a tax specialist.