Tax considerations

As a landlord, you’ll have to declare your income and costs – whether you make a profit or not – and keep all records, invoices, receipts and statements for up to six years.

HMRC has different requirements, depending on which rental income bracket you fall into, so be sure to familiarise yourself with the difference between each bracket.

If you aren’t a resident in the UK and use a letting agent for management you can get an exemption from HMRC so that the rent can be paid over to you gross.

When you come to sell, there are several reliefs that are available that reduce the amount of tax you may have to pay on any capital gain you’ve made on the property, including Letting Relief and your Capital Gains Tax Allowance.

This can be a bit more complex so if you need to know more, you are advised to contact the Inland Revenue.

Stamp Duty Land Tax (SDLT)

From 1 April 2016, anyone purchasing an additional residential property (that is not their only or main residence) for £40,000 or more must pay an extra three per cent stamp duty above the current Stamp Duty Land Tax (SDLT) residential rates.

The current rates mean that you pay SDLT on increasing portions of the property price above £125,000 when you buy residential property.

For instance, up to £125,000 the SDLT rate is zero.

On the portion from £125,001 to £250,000 the SDLT rate that you will pay is 2%.

The portion from £250,001 to £925,000 a SDLT rate of 5% is applicable.

From £925,001 to £1.5 million the SDLT rate is 10% and the remaining amount (i.e. the portion above £1.5 million) has a SDLT rate of 12%.

Therefore, for an additional buy-to-let property landlords will pay an extra 3% on top of these rates.

It’s worth noting that purchasers now have 36 months rather than 18 months between selling a main residence and replacing it with another without having to pay the higher rates‎.

Restriction of allowable costs

All landlords with residential property inside or outside the UK can claim relief for finance costs such as mortgage interest incurred on the property they let. Tax relief is available at 40% and 45% for landlords paying tax at the higher and additional tax rates. However, this tax relief will be restricted to the basic rate of income tax (20%) by April 2020 and is being phased in gradually by the Government from April 2017.

Changes to Wear and Tear Allowance

In April 2016, the Wear and Tear Allowance for fully furnished properties was replaced with a relief that enables all landlords of residential houses to deduct the costs they incur on replacing furnishings, appliances and kitchenware in the property. The relief given will be for the cost of a like-for-like, or nearest modern equivalent, plus any costs incurred in disposing of the old item, or less any proceeds received for, the asset being replaced.

Capital Gains Tax

Landlords are likely to have to pay Capital Gains Tax if they make a profit when they sell a property that’s not their home such as a buy-to-let investment. In the last 10 years, there have been many changes to how Capital Gains Tax is charged. Currently, the rate applicable to gains made on the sale of a property is 28% and this amount is payable irrespective of whether a landlord intends to reinvest theses gains.

To understand these issues further get in touch with your accountant or an independent tax advisor.

For more information on landlord tax considerations and information, visit ARLA PropertyMark.