UK Landlords

​Investing in a buy-to-let can be a good idea but there are a few things from tax perspectives that you need to take into account before deciding to invest.
 
You need to consider that you will probably pay tax when you purchase the property, you will pay tax on the rental earnings and when you decide to sell the property.
 
Stamp Duty Land Tax (SDLT)
More commonly known as stamp duty, SDLT is tax you pay when you purchase any property.
Current rates of SDLT are;

• Properties worth up to £125,000 are exempt
• Properties worth between £125,001 and £250,000 are taxed at 1%
• Properties worth between £250,001 and £500,000 are taxed at 3%
• Properties worth between £500,001 and £1m are taxed at 4%
• Properties worth between more than £1m and £2m are taxed at 5%
• Properties worth more than £2m are taxed at 7%

 
Form April 2016 the government has decided to add an additional 3% above the current SDLT rates for purchases of second home or buy-to-let properties.
 
Income Tax on Rental Earnings
 
Profits form rental income are subject to tax in the same way as other earnings.
 
To calculate your profit you take all rental earning and take away any “allowable expenses” which we discussed in December 2015, to read about “allowable expenses” click here.
 
Capital Gains Tax (CGT)
 
When you dispose of an asset you need to pay CGT on the gains.
 
Every year you have an annual tax free allowance, for the tax year 2015/16 this allowance is £11,100 which means gains of up to this threshold are tax free.
 
Any gains over the annual tax free allowance are subject to tax at 18% for basic rate taxpayers, and 28% for those in higher tax bracket.
 
You could reduce your CGT bill by offsetting some of your expenses against it, as follows:

• Solicitor’s fees
• Estate Agents fees
• Advertising fees
• Stamp duty
• Any expenses incurred when improving the property
• Any qualifying period for Private Residential Relief (PRR) and Letting Relief

 
You don’t pay CGT on your main place of residence, so if for any period you own the property and lived in it as your only home, this period could qualify for Private Residential Relief (PRR).
 
Example of Calculating CGT

If you own a property for 10 years (120 months), live in the property as your main residence for 2 years (24 months) then use the property as second home for 4 years (48 months) and  rent the property for last 4 years (48 months) you can claim both private residence (PRR) and Letting Relief.

​Assume the profit made is £50,000. The amount of PRR you can claim is 24 months, plus 18 months for the final period of ownership, equaling 42 months which equates to 35% of the total period of ownership.
 
You can claim Letting Relief on the 30 months, this is 48 months minus the 18 months of PRR. This equates to another 25% of the total period.
 
Total Gains                                          £50,000
Less PRR                                                £17,500
Less Letting Relief                               £12,500
Less 2015/16 Allowance                     £11,100          
Total Gain Subject to CGT Charge    £8,900
 
The £8,900 is subject to capital gains tax charge at either 18% or 28% depending on the total income of the tax payer in that year.
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For further information please contact us on [email protected].