buy to let tax information

Buy to Let tax information guide

Buy to Let tax information made easy

Entering the buy to let market may seem like a simple way to make money while being exposed to future house price increases. However there are several tax implications that should be considered before taking the plunge. This guide will attempt to give you some buy to let tax information to help you understand the tax obligations of you buy to let.

Income Tax on your buy to let

Any income or rent you receive will be treated as regular income by the inland revenue meaning that you will have to pay income tax on it. If you currently have your tax deducted by your employer under the Pay As You Earn (PAYE) scheme if you become a landlord you'll have to start submitting a tax return / self assessment form each year.

However there are ways that you can minimize the amount of tax you have to pay. Any interest you pay on your buy to let mortgage can be offset against rental income to reduce your taxable income. This rule has made interest only mortgages extremely popular with buy to let investors as all of the monthly mortgage repayment can be used to reduce your taxable income. This effect means that it is more tax efficient to have a mortgage on your buy to let properties rather than the main home that you live in.

In addition certain other expenses such as letting agent fees, maintenance expenses, cleaning costs, service charges, accountants fees and mortgage arrangement fees can also be used to reduce your taxable income. As a result if you are setting out as a buy to let landlord it is crucial you keep detailed records and receipts of any such expenses you incur.

Capital Gains Tax (CGT)

CGT tax is the tax you pay on any profit made when you sell any investment property. Assuming the property has not been your main home then you are liable for CGT for the first 3 years. After that the taxable portion is reduced each year by taper relief. The government has announced that this taper relief will be scrapped in April 2008 in order to simplify any tax calculations. After April CGT will simply be levied at a flat rate of 18%, with no taper relief.

Example:
Property purchase price: £100,000
Sale Price 5 years later: £180,000
Profit = £80,000
Profit per year = £16,000 (£80,000 / 5years)
Total Tax liable = £14,400 (£16,000 x 18% x 5 years)

If the property was your main residence for a period of time you will be exempt for the first 3 years afterwards. In the above example assuming you lived in the property for the firs two years you would only be liable for the gain in the final 3 years so the tax bill would be £8,640 (£16,000 x 18% x 3 years).

Buy to let tax information is generally confusing because there is now specific buy to let tax. However as can be seen above it is actually made up of a number of other taxes that many people pay anyway. Simply by understanding what potential tax liabilities you may face if you become a buy to let landlord, you will be in a better position to properly plan your property investments so that you get the maximum gains in years to come.