There are many positive aspects to being a landlord but it isn’t easy and there are a number of things that landlords need to consider. If you have been confused by landlord tax, or you are unsure of the tax responsibilities a landlord has, our helpful guide will give you a better understanding of what you need to know.
Stamp duty
If you are looking to buy property to let out, you need to be aware that you’ll likely pay more in stamp duty. This is because in 2016, an additional 3% stamp duty was placed on people buying additional property in the United Kingdom. This has been applied to all property valued at £40,000 and above.
A landlord buying a property up to £125,000 would be required to pay 3% stamp duty whereas someone buying a home without owning any other property would pay no stamp duty at all. As the stamp duty bands increase, landlords would have to pay an additional 3% in stamp duty, which can add up to a lot of money.
With a property at £300,000; someone buying their first home would pay £5,000 but a landlord purchasing a property would have to pay an additional 3%, which is £9,000, which means that the total stamp duty bill for the landlord would be £14,000. This may have a big impact on the rental yield a landlord has to pay, so bear this in mind if considering entering the ‘buy to let’ market.
Tax on rental income
A landlord is duty bound to inform the HMRC that they are acting in this role and that they are eligible to pay tax on their income. There are allowable expenses for landlords including accountants fees, letting agents fees, building and contents insurance, maintenance of the property, utility bills, services for cleaning and gardening.
As an example, if a landlord brings in £18,000 per year in rental income but has monthly expenses that add up to £8,000 each year, they would only pay income tax on £9,000.
Change in tax relief for finance costs
One of the biggest issues that landlords have had to contend with in recent times has been the change to tax relief for finance costs. This was announced in 2015 but introduced in April of 2017 and it means that landlords will only be able to claim tax relief at the basic rate, 20%. This is being introduced over a number of years.
There is also a change to way that rental income is calculated. It used to be that rental income was considered as the rent received minus the mortgage interest. As of April 2017, rental income is now classed as the rent alone, which is a concern for some landlords as it may push them into the higher tax rate band.
Any landlord who is unsure about the tax implications of the role or how tax changes will impact on them is advised to speak to a tax or lettings specialist to ensure that they know what is required of them.