Tax advice for landlords

Tax can be complex. There’s a lot of jargon to wade through, rules change depending on where you are, and new government legislation is regularly introduced.

Despite the complexities involved, understanding your tax liability and allowances is absolutely key to maintaining profitability. If you don’t do your research, you might get hit with unexpected fines from HMRC or end up paying much more than you need to. 

To help you get a better understanding of what you have to pay, how to make payments and where you can save, we’ve pulled all of our tax advice into one place. As ever with tax, if you have specific questions about your own financial situation, it’s always best to seek expert advice. However, these articles should help you grasp the basics and highlight areas where you might need support.

Tax advice for landlords | man using calculator to work out taxes

What taxes do landlords pay?

Understanding what taxes landlords have to pay and when they have to pay them can be confusing. A good way to break it down is to think of the lifecycle of a rental property: when you buy it, when you rent it and when you sell it.

Landlords pay stamp duty tax when they buy a property, income tax when they rent it out and capital gains tax when they sell.

Let’s look at each of these in more detail.

If you buy a home for rental or personal use, you’re liable to pay tax on it. This tax is often referred to as Stamp Duty. The exact rules and amount that you pay will differ slightly depending on whether you’re buying in England, Wales, Scotland or Northern Ireland. To ensure that you pay the right amount, you should always seek professional tax advice during the purchase process. 

If you make money from renting out a property, you will probably have to complete a self-assessment tax return at the end of the financial year. The amount that you pay will vary according to your total income and it’s worth calculating in advance how much you plan to make per year and the tax you’ll have to pay on that income. The good news is that landlords also receive certain tax breaks and allowances, and we’ll cover these in the next section. If you’re a professional landlord, you may also have to pay Class 2 National Insurance

If you sell a property that’s not your home and make a profit, you may have to pay capital gains tax. This can also apply to inherited property. GOV.UK have created a capital gains tax calculator to help you work out how much you’ll have to pay in these circumstances. 

If you’re looking for more advice, our podcast featuring Hamilton Fraser CEO Eddie Hooker and Landlord Action founder Paul Shamplina focuses on landlord tax and the recent changes all landlords should be aware of.

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Tax-effective and profitable property ownership

Atypical  or unconventional  living and rental arrangements can sometimes confuse the issue of who is liable to pay income tax on a property. For instance, let’s imagine you own a property, but you allow someone else to receive every penny of the rent in return for managing the property and the tenancy. Do they pay the tax or do you?

The person who benefits from the income always pays the tax. In this instance, that would be the person managing the property. However, the landlord (who doesn’t receive an income) would still need to fill out a self-assessment return indicating where the rental income ends up. This helps HMRC to avoid tax mismatches.

As mentioned earlier, if you’re unsure about who is liable to pay tax on your rental income, it’s always best to speak to a professional. 

If you’re paying income tax on multiple properties, then the total income from the different properties should be pooled together as a single figure and the tax calculated based on the total. The properties should be grouped as follows:

  • UK rentals – any buy-to-let or shared properties rented out on a shorthold tenancy within the UK
  • Overseas rentals – any properties outside of the UK let on a long lease 
  • Holiday lets – homes located within the European Economic Area that qualify as furnished holiday lets. Holiday homes outside the EEA slot into the overseas rental category

Tax advice for landlords | Row of houses

Income tax is calculated based on the total income that a landlord receives. But what happens if they make a loss?

Landlords who make a loss on their rental property – by paying more in expenses than they make in income – can carry the loss forward to offset against future profits. You’re not allowed to store up losses to use when you want to – for instance, to avoid eligibility for a higher band of tax. You have to offset them against your profits each year, until they are used up.

For instance, if you make £15,000 in rent in a year but your allowable expenses for that year are £18,000, you will make a loss of £3,000 and pay no tax for that year. The following year if you make a profit of £2,000, then that sum would be deducted from the previous year’s loss, leaving you with no tax to pay and a remaining £1,000 loss to carry over. If you make the same profit the next year, you can offset £1,000 against the remaining loss and pay tax on the £1,000 that remains. 

The government has introduced a range of new regulations targeting buy to let landlords over the last year or so. And there’s every reason to believe this will continue. This has led many landlords to wonder whether now is a good time to invest or divest. Many of the reasons for divesting are related to the squeeze felt by landlords, as new legislation and tax changes shrink rental profits.

For landlords who want to maintain profitability and protect their investment, it’s never been more important to understand your tax liabilities and allowances.

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Expenses for landlords: what can I claim against tax?

Every pound that you spend on your property reduces your profits, which reduces your income, which reduces your tax bill. 

Tax-efficient property letting isn’t about avoiding tax, it’s about paying what you’re supposed to and knowing where your allowances are. Understanding the expenses you can claim against your tax bill is essential if you want to stay profitable. And provided that the expenses you’re claiming are allowable expenses, you’re absolutely entitled to do so. In fact, the HMRC expects to hand landlords £16.4 billion in tax breaks per year up until 2021.

If you’re unsure what you can claim against, start by checking out HMRC’s list of allowable expenses for landlords – you can find more information on each of these in our guide: Tax news for UK landlords: The complete guide for 2019/20

  • Rent arrears or other outstanding debts
  • Business costs like phone calls, travel and running a home office
  • Fees for services from professionals like accountants, letting agents, solicitors or surveyors
  • Ground rent on the property
  • Insurance cover, including for buildings, contents, and rent guarantee
  • Interest on loans and credit purchases
  • Repairs to and replacements for the property
  • Services like cleaning or gardening
  • Utility bills and council tax (while the property is unoccupied)

And that’s not all. There are a host of other less well-known allowable expenses that are worth reading up on as well.

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Getting your tax return right

Self-assessment tax returns aren’t fun, but they are a fact of life for landlords and it’s important that you get them right. The best way to do this is to do your research and get started early. 

Sadly, many of us leave our tax returns until the last minute. Which is why we published a last-minute guide to getting your tax returns right first time.

Even if the deadline isn’t approaching as you’re reading this, our guide is a great summary of each of the steps you’ll need to take and will tell you everything you need to know to file your tax return in record time. 

And if the deadline is approaching as you’re reading this, hurry up! Landlords who submit late will receive a £100 fine on 31 January and £10 a day from 1 May  up until 1 July , from which point things only get worse… 

Landlords who receive fines can appeal them if they meet certain criteria or circumstances. These include being recently bereaved, hospitalised, suffering from a serious illness or prevented from filing by a faulty internet connection. But not all excuses will be accepted.

Every year, HMRC publishes some of the least plausible excuses they’ve received. A few examples from last year include a man who claimed his mother-in-law was a witch and had cursed him. Or another who claimed he was too short to reach the post box.

HMRC are just as keen for landlords to get their tax returns filed early as we are, which is why they’ve published some great free advice for landlords who are filing tax returns and looking for support. And if you’ve found yourself on the wrong side of the deadline and are wondering what to do, check out our advice for late-comers.

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Council tax

The amount of council tax you have to pay will vary by location. It is up to your council to determine which band you fall into and supply you with a bill for the year. It’s best to register to pay council tax with them as early as possible.

Missed payments earlier in the tax year are carried over to the remaining months, which can lead to large sums of money being paid each month.

There are certain circumstances which allow discounts – such as paying less council tax on a second property if it is not your main dwelling – but these are decided upon by the council at their own discretion. Once again, it’s best to contact your council to discuss whether you qualify. 

Generally speaking, tenants will pay council tax on rental properties, but if the property is empty, the landlord will be liable. Some discounts are available in these circumstances and you should contact the council to see what they offer.

However, it is also possible for councils to increase council tax by up to 50 per cent  if the property has been empty for up to two years.

There are some circumstances where council tax is waived altogether. These include if you are selling a property on behalf of someone who has died, if the property is lawfully uninhabitable or if the home belongs to someone who has been moved into care.

At the end of the day, most buy to let landlords want to earn a good income and protect their investment. Tax-savvy landlords who optimise their tax position without breaking the rules are better able to do this than those who either don’t research tax or don’t pay enough.

If you’re unsure about anything that we’ve discussed in this piece or have specific questions about your own tax liabilities and allowances, we recommend you speak to a professional.