Landlords are taxed on money they receive in rental income. This means all the money they receive in rental income, not just the profits (ie monthly rental income minus their buy-to-let mortgage payment). In the past it was only the profits landlords had to declare but this has since changed.
Having said that, if the total rental income they collect is below the personal allowance of £12,500 then landlords don’t have to pay tax. Most landlords however, if they don’t have a portfolio of properties, do have a day job and a salary. The income from the salary and the rental income must be added together to get a total figure from which to pay tax.
Taxable Rates for Buy-to-Let
A landlord who earns up to £50,000 pays a tax rate of 20%. For those who earn up to £150,000 the rate is 40%. It’s 45% for combined earnings of more than £150,000.
Allowable Expenses for Landlords?
There are certain items that landlords can offset against their tax bill. One of these is marketing the property. That could be via a letting agent, or advertising online on a specific platform (like our own here at Property Loop). You would be able to claim for both of these in your tax return. Others expenses which are claimable, are:
Mortgage payments
All landlords can claim a basic rate of 20% on interest-only mortgage payments.
Furnishings
If it’s your first buy to let and you are renting it furnished, then you’ll be able to claim for the cost of the furniture. If you’ve had your investment property for a while and you need to replace the furniture then you can claim this back too (provided it isn’t too much more expensive than the item it is replacing).
Property Management
If you pay a company to look after repairs and maintenance for your property then this too is an expense you can claim back for tax purposes. You can also claim for the actual repairs if you do it yourself.
Utilities
If you have void period at which point you have to pay the electricity, gas and other utilities, then you can claim this back too.
Services
Ground rent and service charges for looking after the apartment complex can be deducted from a landlord’s tax bill. So too can legal fees and letting agency fees.
How Does It All Work?
The tax year runs from April to April and you don’t pay tax on your annual earnings until the following year. In other words, for the tax year ending in April 2021, you won’t have to pay that tax bill until April 2022. Your expenses for the year also go towards the April 2022 bill.
As the old adage goes, only three things are certain – life, death and taxes. Sort your taxes and you’ll be able to enjoy the income that your buy-to-let brings in. Certainly, that’s always been the case for our own team here at Property Loop. Further down the line, you can enjoy the fruits of all that capital appreciation. In the meantime, you’ll have provided a nice home for a number of contented individuals and even families (depending on how large your rental is).
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