If you're renting out a property, no matter the size or circumstance, HMRC must be informed. If you're confused about your tax obligations our one-stop guide below should offer the help you need.
HMRC's PIM1020 states that "Profits from UK land or property are treated, for tax purposes, as arising from a business.". This is important to note because many people believe that letting out a single property that, in their minds, doesn't earn them much profit, isn't information that HMRC need. They are wrong. In 2014 HMRC calculated they were missing £550m in tax from undeclared property income and have set about reclaiming it, and more. If you believe you have undeclared property income and want to reduce HMRC fines and avoid prosecution, read our section below regarding the 'Let Property Campaign'.
When you purchase a buy-to-let property.
The 2016 Budget revieled increased expenses for people purchasing buy-to-let property. In general, a buy-to-let purchase is in addition to a main residence (home) and is therefore liable for the new Higher Rate Stamp Duty Land Tax or Stamp Duty. Stamp duty is calculated as a percentage of the purchase price of your property and has been increased by 3% across the board. The new figures are as follows:
- Properties worth up to £125k are eligible for a 3% tax*
- Properties worth between £125k - £250k are eligible for a 5% tax
- Properties worth between £250k - £925k are eligible for a 8% tax
- Properties worth between £925k - £1.5m are eligible for a 13% tax
- Properties worth above £1.5m+ are eligible for a 15% tax
*HMRC do not need to be notified about transactions under £40,000 and therefore no tax liability is incurred.
The new changes mean that if a buy-to-let property is purchased at the national average price of £190,000 an extra £5,700 will have to be paid in stamp duty.
Earnings from letting a property are taxed in the same manner as any other earnings, via income tax. Income tax rates for 2016-2017 are:
|Band||Taxable income||Tax rate|
|Personal Allowance||Up to £11,000||0%|
|Basic rate||£11,000 to £43,000||20%|
|Higher rate||£43,001 to £150,000||40%|
|Additional rate||over £150,000||45%|
It is important to note that only profit is taxable so make sure you deduct all allowable expenses from rental income to calculate your profit. In our experience holding a separate 'business' bank account will assist you in keeping accurate financial records.
What can I claim as an expense?
This is the most important part of disclosing your income to HMRC because it is the part that saves you money! Any necessary expense incurred whilst performing your duties as a landlord (minus a few exceptions explained below) can be offset against your yearly income, for tax purposes. See our list of a few of the most common property expenses:
- Mortgage interest - Although you cannot claim your mortgage repayments as an expenses you can claim the interest.
- Buildings & contents insurance.
- General property maintenance - This cannot be an improvement to the property. For example fixing a broken roof is allowable, adding a conservatory is not.
- Accountancy fees.
- Costs of advertising your property - Everything from the cost of the ad to the stationary used is reclaimable.
- Letting agents fees.
- Mileage - Only mileage that is incurred performing your duties as a landlord can be reclaimed (collecting rent, house inspection etc. etc.)
- 10% of the rent for furnished properties - claim 10% of the net rent as 'wear and tear allowance' to allow for usage of purchased furnishing within the property
'Pre-letting' expenses can also be deducted from your first years income if two criteria are met. Firstly, revenue costs (not adding value to the property) and secondly, incurred within 7 years of you renting out your property. The above is not an exhaustive list of allowable expenses available to landlords. Therefore we recommend that if you are unsure about an item contact your accountant or take a look at HMRC's guidelines here.
Selling your property.
Income from the sale of a property is usually subject to Capital Gains Tax (CGT) and its rate is dependent on your income tax bracket. For property developers who buy, renovate and then sell properties as a business, income tax is charged as opposed to CGT. Remember that expenses, such as cost of improvements made to the property are deductible, we will explain more about this below. For basic rate tax payers CGT is set at 18%, for those above CGT is 28% (2016-2017). The first £11,100 of income is exempt under the CGT Allowance for 2016-2017.
Sarah has £28,000 income, per year, from her job as a teacher. She makes a capital gain of £17,500 from the sale of her property. She subtracts her "Capital Gains Tax Allowance" or "Annual Exempt Amount" of £11,100 (2016-2017), leaving £6,400. This leaves Sarah with a total income of £34,400 which mean she is within her basic rate and will be liable for 18% CGT.
£6,400 x 18% = £1,152
John has £25,000 income, per year, from his job as a plumber. He makes a capital gain of £70,000 from a property he has rented out for 20 years. He subtracts his Capital Gains Tax Allowance of £11,100, leaving him with £58,900 subject to CGT. This puts him at £83,900 and therefore well above the basic rate tax bracket. The £58,900 will therefore be liable for 28% CGT.
£58,900 x 28% = £16,492
HMRC offer 'Entrepreneurs' Relief' which will cap CGT tax at 10%, if you meet certain criteria. If the house you are disposing of is owned by you, as a sole trader, and accounts for 100% of your business assets (your only buy to let property) you may be eligible. There are other ways to qualify for entrepreneurs relief and conditions that have to be met for anyone wishing to do so, more information can be found here on HMRC's website.
To reduce your taxable income you would be wise to deduct all allowable expenses against the profit you have made. The most common allowable expenses relating to capital gains tax are:
- Solicitors/conveyancing fees
- Property improvement costs - If you have had work done on your house that has increased its value and therefore was not allowable against your yearly income tax return, this is where you claim the expense.
- Advertising the sale of your property
- Stamp duty paid
If you are unsure of whether you can claim an expense against your income make sure to contact your accountant or visit HMRC's guidelines.
If you have sold your property with a view to reinvesting the money into another buy to let property HMRC will grant up to 3 years for you to do so. During this time you do not have to pay CGT.
If you make a loss on your property you may be able to offset the loss against other gains made in that within the current and future financial years. We always recommend seeking the advice of an accountant when looking to offset losses as there are conditions set by HMRC, that you must adhere to, to qualify.
If you are renting out your property you will need to fill in a self-assessment tax return. This is where you would declare any rental income, capital gains and any expenses incurred against them. Again, we must stress how important it is to file this information with HMRC. If they find out that you have undeclared income from a property they generally impose significantly higher penalties and can prosecute.
If you have income to declare from previous years HMRC introduced the 'Let Property Campaign' which offers a unique way of declaring income whilst minimising your potential fines. Generally our clients have seen offers of 10%-20%, for non-filing fines, accepted by HMRC. This can, for onshore properties, rise as high as 100% but is still a lot less that what HMRC will impose if they find you before you notify them. If you have made a mistake on previously submitted tax returns we advise that you also use the Let Property Campaign to inform HMRC. To apply for the Let Property Campaign you must first complete and send a notification form (D01) to HMRC. HMRC then provide you with a disclosure reference, payment reference and 3 months in which to submit your undeclared information. You will then have to complete and send a disclosure form (D02). The disclosure form requires you work out the profit for the year, tax unpaid, penalty bracket and interest repayable with the help of HMRC calculators. More information from HMRC can be found here on the Let Property Campaign.
Need help or advice?
We at Stone Accountants recommend you use the above information as a guide and always seek the advice of trained professionals when dealing with HMRC. Our specialist property accounting team can advise on any property related matters and are only a phone call or an email away. Please call 01785 748740 or email Enquiries@StoneAccountants.co.uk to see how we can help you.