Whilst there are many variables that will ultimately dictate the amount of tax a landlord will be required to pay, there are also numerous exemptions that rental property owners can take advantage of to lower the amount of landlord tax they are required to pay. Here we explore what taxes do landlords need to pay alongside how much tax landlords pay in the UK.
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Stamp Duty Landlord Tax
Something that has seen a great amount of welcome change in recent time is Stamp Duty. Simply put, Stamp Duty is a fee that landlords are required to pay if the property they are purchasing exceeds a certain price threshold.
Whilst Chancellor Rishi Sunak announced a stamp duty holiday in 2020 in response to the financial devastation many are facing in light of the on-going pandemic. As it currently stands, this relief on stamp duty is set to come to an end at the close of June 2021 however the potential savings a landlord could realise are not to be ignored even as the deadline approaches. During this stamp duty holiday any property under the value of £500,000 will need to pay a stamp duty rate of 3%. However, if the property is purchased for between £500,001 and £925,000 a 8% fee is applied, with property values of over £925,001 and £1.5m seeing stamp duty rates of 13% and 15% being applied above this value. It is also worth noting that anyone already in possession of a property, and those seeking to purchase through a buy to let mortgage will face an additional 3% charge in addition to the rates mentioned above.
Of course this is an opportunistic time to say the least for landlords that are looking to expand upon their rental property portfolio, essentially working to slightly bolster any possible rental yields and capital gains that could later be realised. But, despite how this may appear on face value this is also of phenomenal benefit to renters too, seeing landlord place a heavier investment into the rental market and through new rental opportunities alleviating areas where demand outstrips supply, essentially making renting easier for all concerned parties.
Whilst there is no guarantee of these rates returning to those we saw before the spread of the pandemic, typically the lowest threshold of property value that would be required to pay stamp duty was £125,000, with the appropriate fees being settled within 14 days of the property being purchased.
Income Tax for Landlords
In contrast to some of the other taxes a landlord may be liable to pay such as stamp duty or capital gains tax that come into effect one a transaction takes place, a landlord is required to make income tax payments each and every financial year. If a landlord is in receipt of a rental income then they will be required to complete a self-assessment tax return. A landlord will however be exempt from making these payments if the total amount of rent they charge annually is lower than £1000.
The self-assessment tax return will comprehensively detail the rental income of the landlord from all of their properties collected in the preceding 12 month period. Similarly to capital gains tax, there are a number of deductions that can be made from the total amount of income tax a landlord can be expected to pay; allowing them to account for any business expenses they may have incurred over the taxable period. These allowances will typically comprises any remedial work conducted to the structure of the property, letting agency fees, alongside any accounting fees or contributions towards the interest on a buy to let mortgage. For these deductions to be upheld it is essential for landlords to keep a record of all their deductible expenses for at least five years after they have submitted their tax return.
Council Tax Liabilities
It is essential for landlords to remember that all residential properties in the UK are liable to pay council tax. The amount that must be paid for each property is determined though a banded system. Essentially, all residential properties are evaluated by the valuation office agency, seeing them rank each property through a scale from A to H. The scale used accounts for the structure of the rental property, the type of rental it is alongside its location. These bands are defined through the amount the held properties could reach when sold, however this will show some deviation between local authorities.
In most cases a landlord will not have to concern themselves with any council tax payments, not because they are exempt, but rather because it will be the responsibility of their tenants and any council tax payments that must be paid will be billed directly to them. However, in the instance that the landlord is letting out their rental opportunity to several tenants, each with an independent tenancy agreement, for example a House in Multiple Occupation, the landlord is obliged to cover any council tax payments.
Additionally, as mentioned in most tenancies the tenants will be required to make the council tax payments, but what happens if the property is vacant? Well unfortunately, this will only work to make extended void period even worse for landlord as without any residents, the landlord is left liable to meet such payments. Even still depending on the local authority deductions of up to 50% could be given whilst the property is unoccupied, with additional reductions being made for unfurnished properties that are also vacant; somewhat alleviating the sting during trying times for rental property owners.
It is also worth noting that there are other instances under which the owner of the rental property or its occupants will be eligible for a discounted council tax rate, or exempt from making the payments altogether. With this in mind if the property has a mixture of students and adults the residents of the property may be eligible for a 25% deduction, whilst full time students are exempt from paying council tax. Alongside this, single occupants of a property could also be eligible for this 25% reduction, with careers and occupants of the rental property that are under 18 also be exempt from paying council tax.
As previously mentioned discounts on council tax can also be provided when regarding the type of rental property being offered. Alongside unfurnished properties not being required to pay this tax for up to six months, rental properties that have had significant remedial work carried out recently before the payments are due, can also be exempt for half a year. Additionally if the rental is exclusively occupied by tenants that are under the age of 18 then the property will have the amount that it is required to pay in council tax halved. Similarly, if the accommodation solely comprises full time students as its residents they will be exempt from paying any council tax.
Capital Gains Tax
Capital Gains are often revered by landlords as the backbone of the investment potential of some rental properties. Of course many property owners seek to greatly benefit from an increased rental yield during their tenure as a landlord this approach can be seen as somewhat short signed, with a longer term property investment strategy being synonymous with realising higher capital gains on a property. Of course, it is worth noting that when a landlord chooses to sell their rental property a tax must be paid on the premium made of the sale of the rental. Naturally, seeking to take advantage of the nation’s increasing house prices can help landlords to see a much larger return on their investments, but put simply, Capital Gains tax is a tax on the amount the sold property has increased in value, and therefore the landlord’s profits.
Whilst the rate a landlord would be required to pay in Capital Gains Tax would fluctuate each year, for 2021 the UK legislation enforces an allowance of up to £12,300 before any CGT must be paid. With this in mind, if a landlord purchased a property for £150,000 and went on to later sell this rental for £200,000n they would then be required to pay the appropriate amount of capital gains tax on this £50,000 realisation. However, as the UK government has established a monetary threshold of £12,300 before any CGT tax must be paid, the landlord is left with an interim capital gain of £37,700. The Capital Gains Tax rate is 18% for and basic rate taxpayers, with the rate increasing to 28% for any higher and additional rate tax payers. If we deduct the taxable rate of 28% from the realised profits coming from the sale of the rental property, the landlord is left with £27,144. However, for landlords looking at this taxable figure in horror, and understandably so, can rest easy knowing that multiple deductions can be made, allowing the total amount a landlord must pay in tax to be reduced.
The landlord is required to make the payment of CGT within 30 days of the rental property being sold, with these sums perhaps being attributed to the purchase of the next rental opportunity.
Capital Gains Tax Deductions for Landlords
Alongside the allowance given before any capital gains tax must be paid, as mentioned there are a number of expenses that if incurred, a landlord can deduct from the total amount of CGT they will be required to pay. Typically, these are attributed to the unavoidable expenses accrued when going through the motions of selling a rental property. Therefore any costs that the landlord has paid in relation to having the property surveyed or inspected, alongside any fees generated through letting agents, solicitors, buy to let mortgage brokers and even stamp duty can be deducted from the total amount of capital gains tax the seller would be obliged to pay.
Additionally, if the rental property has seen any major improvements since it was initially purchased by the landlord; further deductions can be made for the associated costs. Whilst the fees that come with extending the property, replacing a boiler, having new insulation, installing double glazing windows alongside other improvements to the rental can be deducted as the landlord completes their annual self-assessment tax returns, if they choose not to do so the costs can be offset through capital gains tax expenses. However, it is important to note that these costs with repairing and improving the rental property cannot be claimed for repeatedly, if they have already been deducted from the landlord’s income tax payments, a second claim can’t be made for the same costs when trying to reduce their capital gains tax.
Further deductions can be made from the amount of capital gains tax a landlord would be expected to pay if they have lived in the rental property for any period of time. The significance of the deduction will be depended on the amount of time the landlord resided in the property, with this tax relief being available to both live in landlords, and rental property owners that choose to live in the let, but later find a permanent residence elsewhere. It is also worth noting that the tax free allowance is held by the individual, rather than the property itself, meaning that if a rental property has multiple owners the existing threshold at which CGT would be paid is essentially multiplied by the amount of owners.
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