Landlord errors and how to avoid them - Not understanding landlord taxation

If you’ve been a landlord for a number of years - and particularly if you have a portfolio of properties - you’re likely to be well aware of how complicated property tax can be. However, if you’re relatively new to letting property, especially if you’re an ‘accidental landlord’, you simply may not know about how landlords are taxed.

Because property tax is a specialist area, we’d recommend you speak to a financial or tax adviser who’s experienced in the field of buy to let and can ensure your property business is set up and your tax return completed in a tax-efficient way.

Meanwhile, here are three key things to know:

1. Your income from property is added to your income from other sources for tax purposes. Some landlords believe when they start letting that their rental income is ‘stand alone’ and profits from property are taxed separately but that’s not the case. Although it’s a separate section on your Self Assessment tax return, your property income (after allowable expenses) is added to your income from other sources – such as employment or shares – to give a total taxable income figure.
   
   So you need to be aware that property income could take your overall income into a higher tax bracket and may also have an implication for any benefits you receive. If you have a spouse or partner and one or both of you currently pay income tax at the basic rate, it’s worth discussing with a tax adviser or wealth manager the most beneficial way for your household to receive property income so you minimise your overall tax liability.
    
2. Not all expenditure is equal! As you might expect, when it comes to completing a tax return, residential landlords are able to deduct allowable costs from their property income to arrive at a taxable profit figure. However, these costs are divided into ‘revenue expenditure’, which can be deducted from your rental income, and ‘capital expenditure’, which is deducted from the capital gain when you dispose of the property.
   
   A simplified explanation of the difference is that revenue items are expenses that have been incurred exclusively in order to earn income from your rental – things like business admin costs; maintenance services, such as cleaning and gardening; repairs to fittings and furnishings; fees for professional services, such as your letting agent and accountant, and insurance costs. Capital expenses are things that enhance the property’s value, for instance, completely renovating a kitchen or adding an extension.
   
   However, some works may have both revenue and capital costs and allocating them correctly is not easy, which is why it’s highly advisable to engage a property tax specialist.
    
3. Capital Gains Tax (CGT) is higher for property than for other assets. Many landlords have chosen to invest in property not only for rental profit but also because property typically increases well in value over time. However, in order to be able to plan and budget ahead, it’s important to know that CGT rates for gains on residential property are 8% higher than for other chargeable gains: 18% if your property gains together with any other taxable income falls within the basic rate tax band and 28% for higher-rate tax payers. This is versus 10% and 20%, respectively, for gains on other assets.
   
   Another key thing to make sure you understand about CGT is that it’s not simply a charge on the equity you’re left with when you sell or dispose of the property. The taxable gain is the difference between the purchase price and the sale price or the value of the asset when you pass it on, less your personal allowance and any other allowable deductions. So if you remortgage and release capital from your investment property, check to see whether there’s enough equity left in to at least cover any CGT bill if you have to sell – this is particularly important if you’ve held the property for a number of years and it’s increased well in value.
   
   And note that while the CGT personal allowance for the current tax year (2022/23) is £12,300, that’s dropping to £6,000 for 2023/24 and to £3,000 from April 2024.
   
   For more information, see the GOV.UK website.

If you’d like to talk to us about any aspect of buy to let investment, we’re here to help. Just get in touch with your local Reeds Rains branch and make an appointment with one of the team.

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