Member Article

Lower Your Expenses On Buy-to-let Tax

Becoming a landlord with a buy-to-let angle can mean anything, from having good returns to struggling depending on the current market and location of your property. If you can find a good property that would offer a practical solution to your needs as a landlord, then you should have a really good chance to build up a decent amount of income from rent as time goes by.

The returns you make will also need to be reported, so you will have to consider that, as not declaring the income you have on income property as well as capital gains when you’re selling, then you may face some issues.

Mortgages and Tax

There is something you need to keep in mind when it comes to mortgages that make it clear that you have been working on letting your properties. You will need a different type of mortgage compared to the one you would get for your home. Lenders will also want to know if you have started out renting because this is not something allowed under the usual terms and conditions concerning residential mortgage. If that is the case, then you will need to move to a buy-to-let rate instead and that could involve hiring a moving professional.

Most banks out there and building societies offer buy to let mortgages you can make use of. The rents will be higher than residential mortgages, which is because of the risks involved when tenants are not paying rent and the potential for landlords to default under such circumstances. Buy to let is considered an investment so it is subject to income tax as well as capital gains tax on sale. You will also have to work on paying stamp duty on your property purchase.

There will be those that believe they can escape and dodge the taxes levied on buy-to-let, potentially not paying tax on rental income or with capital gain. That may have been possible in the past, but lately landlords have become even more scrutinized than before. At the same time you have mortgage lenders cracking down on letting properties but staying on residential mortgage. The bottom line is you have a much bigger chance to get caught today skipping on taxes than before.

Paying stamp duty

The first tax that needs payment when you’re building a buy-to-let portfolio is stamp duty, much like it is when you are doing for a residential home, the same goes for purchasing a property for that purpose. You will pay a different tax depending on the market value of your property, so keep that in mind as the tax will vary according to that particular factor. Once that is done you will also need to consider your other expenses, but generally the lower the property value, the lower the stamp duty tax will be.

Income tax paid on buy-to-let properties

You will need to work on completing a self assessment on your tax return so you can pay the income tax on any of the rent you receive. The amount you pay will be determined based on your income tax banding. If you happen to be a basic rate taxpayer you will end up paying 20%, with 40% for a higher rate and finally 45% for any additional rate.

You can work on reducing the amount of tax you have to pay by offsetting it with allowable expenses you can claim for with the HMRC. The big break in this case is that you can claim for interest on any buy-to-let mortgage payments, which in turn will help offset the mortgage interest against your rental income, meaning you will pay income tax on the profits that are technically the gap between both.

Unfortunately this is changing with the coming laws, since from 2017 on this will eventually be limited to 20% tax relief and in the end your calculations will have to change accordingly. You can also currently offset some of the allowable expenses, as well as arrangement fees for setting up loans for your property.

Maintenance costs for your property, as well as letting agent fees may also be claimed. Landlords were able to automatically claim a 10% wear and tear yearly for any furnished property, but that is no longer the case as you can only claim expenditure that you actually made. You may also claim for buildings and contents insurance, as well as council tax and utility bills in case your tenant is not really paying them. In case you’re not aware of what needs to be done you may need to check up with an accountant at the HMRC for more information. At the end of the day this will give you a good chance to handle taxes in a way that allows you to take care of it all.

This was posted in Bdaily's Members' News section by Bonnie Osborne .