What are the Tax Implications of Your Buy-to-Let Property?

What are the Tax Implications of Your Buy-to-Let Property?

Death and taxes – there’s no way you can avoid either. While there might appear to be loopholes and ways for fiddling with numbers that trick you into believing you might get away with paying a marginal amount of tax, it's not often that you can get away with it ad infinitum. So it’s best to bite the bullet and get used to the idea of parting with your hard-earned money because failing to pay tax carries a very high price, one which you certainly don’t want to pay.

Unfortunately, many landlords (especially first-time buy-to-let landlords) fail to consult tax advisors come tax season, despite being clueless when it comes to taxes. It’s a bad habit which can get them into very hot water. So let’s take a look at what taxes buy-to-let landlords have to pay.

Income tax

Any money that you get from your buy-to-let property counts as part of your income, so you need to pay tax on your rental income minus costs. The costs that can be subtracted include mortgage interest, letting agents’ and accountants’ fees, utility bills, council tax, cleaning, maintenance and repairs. You can’t, however, claim for improvements to the property. Take note that the deposits you receive from the tenants must be excluded as it’s not technically part of your income. If you share ownership then you can only claim from the percentage that reflects your share.

Capital gains tax

Capital gains tax (CGT) is paid on the net gain of your property’s value from which various costs have been subtracted. These costs include buying and selling costs (e.g., stamp duty and estate agents’ fees) and renovations and additions (but not standard maintenance, decorating and repairs). You’re looking at a tax rate of either 18% or 28%, depending on which band you fit in.

In the case of a shared ownership, there is a capital gains tax-free allowance of £10,900 per person. If you’re selling your primary residence you can get Private Residential Relief and Lettings Relief. You can find out more about what Private Residential Relief entails, including restrictions, on Property Tax Portal and TaxAid.

Inheritance tax

As wonderful as it may sound, receiving or giving a house to a family member or friend can be a tax nightmare. Unfortunately, the tax relief available is next-to-nothing, and the threshold is quite low: Currently £325,000. Chances are good that if you own at least two properties you’ll exceed that threshold.

Joint ownership makes the whole affair even more complicated, which is why it’s essential that you always consult a property tax specialist when you need to sort out your finances. That way you’ll save yourself a lot of headaches (and penalties) every tax year and your heirs will remember you with gratitude, not bitterness.

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