As understood by the name itself, Buy-to-let Tax is the tax you pay on the property which you have bought and rented it out for additional income. Investing in a buy-to-let property is very different than buying property for your own residential purpose and it is more like starting or rather getting ready for a small business. Buy to let is for sure a good way to have additional income however you need to have a good judgment and consider all the aspects like change in the tax law, possibility of rent not coming in, increase in the interest rate etc and not to mention, the added responsibility which comes as a new landlord.
Your success with buying to let depends on choosing the right property and you, as a future landlord must consider three important points before buying the to-let property, such as:
While a buy-to-let property can help in generating an additional income for you, you need to consider all costs, both upfront and ongoing to ensure that it is going to be a profitable project for you and best way to ensure the same is to get some financial and legal advice before purchasing a buy-to-let property. Costs which need to be considered are:
Income Tax: So, as soon as you start generating income from your rental property, you have to inform Her Majesty’s Revenue & Customs (HMRC) about the same and report your rental income to them every year. Since tax laws can change, it is advisable to have a financial and tax advice from an expert on the same. Any income you receive from the rent is taxable and you have to declare the same in your Self-Assessment tax return and the tax on your income is then charged based on the income tax band i.e. 20% for basic taxpayers, 40% for higher rate and 45% for additional rate.
However, you can reduce your Buy-to-Let Tax by deducting certain allowable expenses from your taxable rental income, such as:
Apart from Income tax, there are various Buy-to-let taxes which may affect your rental property such as:
Stamp duty has to be paid within 30 days from the date of purchase of your rental property, however, solicitor pays it only after the completion and its amount is deductible from any capital gains which you might make when the property is sold.
Capital Gains Tax: In case you sell the property for more than you have paid for it after deducting costs such as stamp duty and estate agent/solicitor fees, you need to pay the capital gains tax on it because you make a profit by selling it at a higher price. However, since you are an individual, you get an annual allowance to set against any gain and for the year 2016/17, this allowance is £11,000 and in case you gain more than the allowance, you need to pay the tax at a rate of either 18% or 28% on the profit depending on the amount of income and capital gains you might make.
You can reduce your capital gain tax liability by:
2017 witnessed a major change in the buy-to-let taxation policies which were originally announced in the year 2016; however, they got implemented in the year 2017 and it mainly affected mortgage interest payments. Before 2017, it was possible for the higher rate taxpayers to offset these payments against their rental income however, from 2017, it became difficult and thus resulted in higher tax bills.
In simpler words, earlier people buying to let have been able to claim Buy-to-Let Tax relief on their mortgage interest payments at their marginal rate of tax i.e. the basic rate tax payer would get 20% tax relief whereas the higher rate tax payer would get 40% tax relief and top-rate taxpayers could claim 45% tax relief. However, post the changes to buy-to let tax relief, a flat 20% tax relief will be available to all, irrespective of whether you are a basic or a higher or a top-rate taxpayer. So, those who were at basic rate tax would see no change but those who were at higher or at a top-rate tax band will find losing more money.
This change in buy-to-let tax relief will be phased out gradually from April 2107 to April 2020 to ensure that there is no sudden increase in the income tax for the landlords. However, even with this approach, the impact on the landlords is going to be quite severe. For example:
Someone with a £150,000 buy-to-let mortgage on a property worth £200,000, with a monthly rent of £800, would currently have a net profit of around £2,160 a year. Under the new system, the net profit would plunge to £960.
However, there are ways in which landlords may be able to at least minimize the impact of the changes, such as by increasing the rent of their buy-to-let property or by converting mortgages into a repayment plan.
When you are planning to buy an additional property apart from your residential property, in order to let it out for an additional income, you need to understand how much potential rental income you can generate on it because based on this calculation, mortgage lenders will decide whether to lend to you or not.
There are various calculators online to calculate the same for you based on certain factors such as expected rental income from the buy-to-let property, tax deductible costs, mortgage interests, earnings and other non-savings income, savings income and net dividend income.
You can consult our experts to help you in calculating your buy-to-let mortgage for a better understanding.
Similarly, you need to calculate how much tax you are going to pay on your rental property to ensure that you are having a sizeable or at least expected profit from it. While calculating the same, you need to consider factors, such as:
For queries related to buy-to-let tax changes, you can get in touch with our experts at email@example.com
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