Buy-to-let and tax
Many first-time landlords forget to take tax into account when doing their calculations. Income from rent is just like income from any other source, and so is subject to income tax. Take extra care if you are already near one of the tax bands, as income from your rental property could push you into the next tax band – making a serious dent in your profits.
Buy-to-let tax relief
Until April 2017, landlords can deduct mortgage interest from their rental income before the tax they owe is calculated. This is known as buy-to-let tax relief. However, from April 2017 the tax relief is changing to a flat rate of 20 per cent. Higher-rate and additional-rate taxpayers (who currently receive 40 and 45 per cen tax relief respectively) will therefore have to pay more tax.
The change may also push some landlords into a higher tax bracket, because the tax bracket will be worked out before interest is deducted. THis change will be phased in over three years, starting in 2017.
All second and subsequent properties (including all buy-to-let property except corporate buildings) are subject to an additional 3 per cent stamp duty.
Capital gains tax
Tax may also be a factor when you sell the property. As it isn’t your primary residence, any increase in its value may be subject to capital gains tax. Anything over your annual allowance (£11,100 in 2016/17) is taxable at 18 per cent (or 28 per cent if you are a higher-rate taxpayer).
Capital gains tax must be paid by the end of the tax year. However, from April 2019 it must be paid within 30 days of the sale of a property.
Reducing your tax bill
Necessary expenditure may be tax-deductible, which means it can be set against your profits when calculating how much income tax you owe. For this reason it’s vital to keep detailed accounts of everything you spend on the property.
Tax is such a big factor in buying to let that it’s highly advisable to have an accountant to keep track of it all and improve your tax efficiency – particularly if you have more than one rental property. Find an accountant here.
To discuss the implications of the tax reforms to buy to let, speak to an independent financial adviser. You can find one here.
Questions to ask your mortgage broker:
- How much can I borrow?
- How big a deposit do I need?
- How can I achieve a lower interest rate?
- Can I extend the mortgage term?
- What are the risks?