As a landlord or property investor, you’ll have to pay tax: quite a bit of it, and (in most cases) more than you would have done a few years ago.
Is that a reason not to invest at all? No, if you still believe in the long-term performance of property. But it does mean you can’t ignore tax: if you don’t take steps to minimise your tax bill, your inaction will cost you thousands of pounds.
After reading this article, you’ll have a good understanding of what taxes landlords have to deal with – and at the end, we’ll give you your next steps for taking action and sorting out your tax situation.
Nothing on this page should be taken as tax advice. This is for general information purposes only and should not be relied on: we recommend you consult a qualified tax advisor before making any decisions.
Strap yourself in, because there’s quite a list:
So, already you should be getting the idea that anything you can do to reduce your tax bill will make a big difference to your wealth.
That’s Stamp Duty Land Tax (SDLT), to give it its full name, or Land and Buildings Transaction Tax (LBTT) in Scotland.
The rate of Stamp Duty depends on the value of the property, and the Money Advice Service has a useful Stamp Duty calculator here.
However! Make sure you choose the option for “I am buying an additional or buy-to-let property”, because property investors have to pay an extra 3% on top of the standard rates.
You can only escape Stamp Duty by buying a property for less than £40,000.
Whether you pay Income Tax or Corporation Tax depends on whether you hold property in your own name or as a limited company.
In either case, the tax you owe will be a percentage of your income minus your allowable expenses.
The Corporation Tax rate is currently (at the start of 2019) 19%. You can find the Income Tax bands and allowances here, but the majority of people who are in a position to invest in property will have some income falling into the 40% band.
Does that mean that owning property within a limited company is a slam-dunk, because the Corporation Tax rate is less than half of most investors’ top Income Tax rate?
Not exactly. There are myriad interweaving factors that determine which is best for your situation, and only an expert accountant can help you make the decision. To get the general overview, you might find this article helpful.
One advantage of limited company ownership is it swerves a very unpleasant new rule that was introduced a few years ago…
We’ll come on to other expenses you can deduct from your income before paying tax in the next section. One expense you’d probably think you could definitely claim would be the interest on any money you’ve borrowed to buy the property: after all, every business is allowed to deduct any finance costs it incurs.
Well, as we hinted at, for properties held within limited companies, that’s still the case. For individuals though, a bizarre and unpleasant new tax treatment was announced in 2015.
For properties held by an individual, mortgage interest now isn’t an allowable expense. So you have to calculate your profit without deducting the cost of your mortgage – but then you do get to apply a “relief” of 20% of your finance costs before arriving at the amount of tax you need to pay.
Did you follow that? Probably not: lots of professional accountants were scratching their heads for months after this was announced. This article has more detail, and some worked examples.
The upshot, though, is you’ll end up paying more tax than you “should” if you’re a higher-rate taxpayer.
And as a result of everyone’s profits being artificially inflated by the new calculation, more people will be higher-rate taxpayers than were before.
(Even more confusingly, this is being phased in until April 2020 – so some of your income will be treated the “old” way, and some the “new” way. We won’t get into that more here, because there’s a real risk your head exploding already.)
The simplest way of keeping your tax bill down is to deduct all the expenses you legitimately can. The majority of property investors pay more tax than they need to, simply because they don’t realise all the different deductions they’re allowed to make.
Before arriving at your profit figure, you can deduct any expense you incur in the day-to-day running of your business. The technical name for these is revenue expenses, and they include:
You can also claim for your relevant mileage, the use of any part of your home as an office, any training you undertake to develop your skills as an investor, and a whole lot more. Many investors don’t claim these, because they don’t know they can or they don’t know how to calculate them correctly. A specialist accountant should quiz you about these expenses, and make sure you’re deducting everything you possibly can.
There’s another type of expense – known as capital expenses – which you can’t offset against your rental income, and can only get back when you eventually sell the property.
These are anything related to the acquisition or the improvement of the property: in other words, something you do to increase the value of your portfolio rather than just keep it ticking over.
These expenses aren’t as good as revenue expenses (so far as any expense can be “good”), because it might be years until you’re able to get them back. They only become relevant when you sell the property, and want to reduce your Capital Gains Tax…
When you come to sell a property, you’ll pay Capital Gains Tax on the difference between the price you sold it for and the price you bought it for. You can also add your capital expenses to the price you bought it for to reduce the amount of taxable profit.
The calculation isn’t straightforward, but you can find the government’s guidance about rates and allowances here.
The key to keeping your Capital Gains Tax bill as low as possible is to make sure you claim all the capital expenses you can – so make sure you keep all your receipts as proof.
Alternatively, just not selling a property works well too.
Clearly, the government isn’t a big fan of property investors and you’ll have to get used to making uncomfortably large bank transfers to HMRC once or twice a year.
But that doesn’t mean there’s nothing you can do. In fact, it’s never been more important to take control of your tax affairs. The difference between structuring your property investments the right way and the wrong way could easily be tens of thousands of pounds – and even small changes to the expenses you claim could save you hundreds of pounds every year.
The actions you can take might include:
The changes of being able to optimally do this yourself – without making a mistake and breaking the law – are close to zero.
Because taxation for property investors is so complex and the numbers are so big, it’s critical that you get advice from an expert accountant. Our own service Property Hub Tax specialises in advising property investors, but whoever you choose, do make sure you get the right advice.
Before speaking to an accountant, it’s worth gaining as much knowledge as you can yourself so you can assess whether they’re they’re doing everything they should for you.
Will learning about tax be the most exciting thing you do all year? Unless you have an exceptionally boring life, probably not – but there’s a good chance it’ll be the most profitable.