At every step, we will be weighing up the implications for Income Tax, Capital Gains Tax and Inheritance Tax and showing you the most beneficial path forward. We will also confirm your obligations regarding Stamp Duty Land Tax.
Tax implications of being a landlord
If you are receiving income related to a property where the gross income exceeds £1,000, you need to submit a tax return to HMRC. You need to report to HMRC the income and the allowable expenses you have incurred related to the property. Allowable expenses would include insurance, repairs and maintenance (where there is no improvement element to the works), service charges, agent fees and mortgage interest.
Mortgage Interest Relief is given by way of a tax credit based on a maximum of 20% of mortgage interest payments made. If you need information regarding how to deal with calculating the deduction allowed, please get in touch.
The phasing out of mortgage interest tax relief, which began in April 2017, is nearing its conclusion. For this tax year – April 2019-April 2020 – landlords can only deduct 25% of their mortgage costs from rental income in order to reduce their tax bill, with the rest receiving a tax credit based on 20% of mortgage interest payments. From April 2020, landlords will not be able to deduct any of their mortgage expenses from rental income as the phasing out completes which means that only a maximum of a 20% tax credit can be claimed. If you need information regarding how to deal with calculating the deduction allowed, please get in touch.
Previously HMRC gave a 10% wear and tear deduction on furnished properties however this has been abolished and replaced with replacement relief. Effectively you are allowed a deduction against rental income if you are replacing an item within the property which may be considered to be capital (such as furniture and white goods). You do not get a deduction for the initial purchase of the item, however when you replace it, you are allowed a deduction.
When purchasing a second property, you should be aware that an additional 3% stamp duty land tax may be payable.
When you sell the property, any gain you make will be within the scope of capital gains tax and residential property is taxed at either 18% or 28%.
If you rent out a furnished holiday let, there are a few conditions which you may meet which qualify you for preferential tax treatment, such as the full deductibility of mortgage interest and the potential for a capital gain to qualify for Entrepreneurs’ relief which would charge a capital gain at 10%.
We will also give you our best advice on the Capital Gains Tax payment window for residential property gains, which is changing from April 2020. This could have significant cash flow implications for you. Please refer to the capital gains tax planning section for more information regarding this.