:: Property Tax ::

52 Ways to Save Tax #27

pay less taxAccording to HMRC, there are more than 1.75 million landlords in the UK banking over £14 billion a year in rental income.

If you’re a landlord, then you will have a number of potential tax liabilities on your rental property. In the latest part of our “52 Ways to Save Tax” guide, we look at how you reduce the amount of income you can pay on your buy to let investment.

52 Ways to Save Tax – Part 26: Claim all the expenses on your ‘buy to let’ property

The income that you receive as rent on investment property is taxable. Unless you are set up as a company, you have to declare any rent that you receive as part of your Self Assessment tax return. The tax is then charged in accordance with your own income tax band:

  • 20 per cent for basic rate taxpayers
  • 40 per cent for higher rate taxpayers
  • 45 per cent for additional rate taxpayers

Bear in mind that adding your rental income to your other earnings may push you into a higher tax band.

You can reduce the amount of tax that you pay by deduction certain allowable expenses from your rental income. These expenses include:

  • Council tax and ground rent
  • Buildings insurance on the property
  • Property repairs and maintenance (although large improvements such as an extension are not income tax deductible)
  • Legal, management and lettings agency fees
  • Other related property expenses
  • Interest on buy to let mortgages (see below)

In 2015, the Government reduced the amount of interest tax relief on buy to let mortgages. These changes come into force in April 2017. Prior to April 2017, tax is payable on your net rental income after deducting allowable expenses including mortgage interest. If you pay higher or additional rate tax you can claim tax relief at your highest rate.

However, from April 2020 tax relief can only be reclaimed at the basic rate, whatever rate of tax you pay. These rules are being phased in over 4 years beginning in April 2017.

Reducing the amount of Capital Gains Tax that you pay

If you sell a buy to let property for more than you paid for it then you may be liable for Capital Gains Tax (CGT).

As well as reducing the amount of tax you pay on your rental income, you can also reduce the amount of Capital Gains Tax you pay when you sell the property. Legitimate ways to reduce your CGT bill include:

  • Using your full CGT annual allowance (£11,100 in 2016/17)
  • Carrying over a loss made on the sale of a buy to let property in previous years
  • Deducting solicitors fees
  • Deducting estate agents fees
  • Deducting the costs of advertising the property for sale
  • Deducting stamp duty
  • Deducting any expenditure on ‘capital’ items

There are also certain tax reliefs available. For example if the property was previously your main residence, the gain may be reduced.

52 Ways to Save Tax #10

If you sell an asset for a profit then you may have to pay tax on the money that you make. This is called ‘Capital Gains Tax’ and could leave you with a sizeable tax bill if you sell shares, antiques or investment property for a profit.

In the next part of our series ‘52 Ways to Save Tax’ we look how you can pay less tax by using your annual Capital Gains Tax allowances. Keep reading to find out more.

52 Ways to Save Tax – Part 10: Use your Capital Gains Tax allowance

Capital Gains Tax (CGT) is the tax that you pay on the profit that you make when you dispose of an asset. Remember that any tax that is due is paid on the ‘gain’, not the whole amount you sell the asset for.

For example, you buy a painting for £10,000 and sell it for £50,000. The ‘gain’ you make is £40,000 and any CGT that is due would be paid on this amount.

It is not just selling an asset that creates a potential Capital Gains Tax liability. You may also have to pay tax if you gift an item to someone else, swap it for another asset or if you got compensated for it (for example if you received an insurance payout because an asset was destroyed).

When you may have to pay Capital Gains Tax

You may have to pay Capital Gains Tax if you make a profit (‘gain’) when you sell/dispose of a personal possession for £6,000 or more. Assets on which CGT may be payable include:

  • Jewellery
  • Paintings
  • Shares not held in an ISA or PEP
  • Antiques
  • Stamps and coins
  • Property that is not your main residence

When you don’t pay Capital Gains Tax

There are certain items that are exempt from Capital Gains Tax and certain annual exemptions that you can use. These will help you to dispose of an asset on which you have made a gain without having to pay any tax.

You don’t pay CGT on:

  • NISAs, ISAs or PEPs
  • Betting, lottery or pools winnings
  • UK Government gilts
  • Premium bonds
  • Personal possessions with a lifespan of less than 50 years
  • Most gifts to your husband, wife, civil partner or a charity
  • Your car – unless you’ve used it for business

You also have an annual Capital Gains Tax allowance, called the Annual Exempt Amount. This means that you only have to pay Capital Gains Tax on your overall gains above your tax-free allowance which, in the tax year 2014/15, was £11,000.

Working out your gains

You won’t pay any Capital Gains Tax if your total taxable gains are below your annual Capital Gains Tax allowance (£11,000 in the 2014/15 tax year). To work out what your gains are you should:

  • Work out the gain you have made on each asset that you have disposed of in the last tax year (shares, personal possessions etc)
  • Add together the gains to make a total
  • Deduct any allowable losses

If your total gains are below your allowance you won’t have any Capital Gains Tax to pay.

If your gain is above the CGT allowance then you will have some tax to pay. The basic rate of CGT is 18 per cent although higher rate taxpayers – which may include you if your gains added to your other income carry you into the higher band – pay 28 per cent.

52 Ways to Save Tax: #9

Do you have a spare room in your home? If so, renting it out can be an easy way for you to reduce your tax bill. In the next part of our series ‘52 Ways to Save Tax’ we look how you can reduce your earnings by taking in a lodger.

Keep reading to find out how using the ‘Rent a Room’ scheme can help you to pay less tax.

52 Ways to Save Tax – Part 9: Rent out your spare room

If you own a rental property then you are generally taxed on the income you receive less any allowable expenses. However, if you let out furnished accommodation in your home then you are entitled to a tax break.

If you rent out a room in your home then you may be eligible for the ‘Rent a Room’ scheme. This scheme allows you to earn up to a threshold of £4,250 per year tax-free from letting out furnished accommodation in your home. You can let out a room or an entire floor of your home.

You can opt in to the ‘Rent a Room’ scheme at any time if you are a resident landlord or if you run a guest house or a bed and breakfast. It is worth remembering that you don’t have to be a homeowner to take advantage of this scheme. If you are a tenant yourself you can also lease out a room to a lodger, as long as your own lease allows you to do so.

If you do own your home you should check with your mortgage lender (if you have one) to ensure that you are allowed to rent out a room under the terms of your home loan.

How you can earn £4,250 without paying tax

If the income you receive from renting a room is less than the threshold (currently £4,250) then you are automatically exempt from paying tax on this amount. You do not have to complete a tax return.

If you earn more than the threshold then you must complete a tax return to declare the income. You will opt into the ‘Rent a Room’ scheme and claim your tax-free allowance via your tax return.

Bear in mind that the income (and the threshold) is halved if you share the income with your partner or someone else.

Two things to bear in mind

As well as the rent you charge for the room you may wish to also charge for services such as providing meals or laundry services.

Any income you receive from these services must be added to the rent you receive for tax purposes. If the total income from rent and other charges exceeds the threshold (currently £4,250) and your overall income is greater than the individual Personal Allowance, you will need to pay some tax.

Your responsibilities as a landlord are to keep the property safe and in good repair. Your tenant does not have the right to challenge the agreed rent and you don’t have to give as much notice to end a letting than if you rented out the property as a whole.

 

Are you paying the right amount of tax on your rental income?


If you are a landlord and own a rental property, you probably have to pay tax on your rental income. However, a new campaign by HM Revenue and Customs is targeting up to 1.5 million landlords who may have failed to pay or underpaid the tax that they owe.

HMRC estimates that landlords are underpaying by around £500 million each year. So, we look at when you have to pay income tax and what the repercussions are if you don’t pay the tax that you owe.

How to work out if you should pay tax on your rental income

Many landlords earn significant income from rental property, particularly if their homes are in London or the South East. The graph below shows the average rental income in the UK regions and even in the areas that generate the least rental income landlords can expect to earn in excess of £6,000 a year from rental income.

 Average monthly rents in UK

If you earn rental income then the tax you will pay is worked out as follows:

1. Add up all the rental income you receive from your rental property/properties

2. Add up all your allowable tax expenses (as detailed below)

3. Take your allowable expenses from your income

Your allowable tax expenses include mortgage interest payments, lettings agent’s fees, buildings insurance, repairs and maintenance to the property, ground rent and service charges.

If you are an employee on PAYE and your net profit from property is under £2,500, you do not have to complete a self-assessment tax return.  Your tax code can be altered to claim the tax you owe.  You will have to complete HMRC form P810 every year.

If you are not on PAYE, or it your net profit from property is above £2,500, you will have to complete a self-assessment tax return.  If your net profit from property is under £77,000 you can group all the income and expenses as one figure on your tax return.

If your total income from UK property is over £77,000 (20012/13) or more in a tax year you must declare it on the property pages of your Self Assessment tax return and show your expenses separately.

HMRC targeting landlords who haven’t paid the right tax

If you have not paid tax on your rental income then you may be able to take advantage of an 18 month tax amnesty. HMRC have announced that penalties on unpaid tax will be reduced for those landlords that come forward and have warned that anyone who fails to pay tax could face criminal proceedings.

Marian Wilson, head of HMRC Campaigns, said: “All rent from letting out a residential property or holiday home has to be declared for income tax purposes. Telling us is simple and straightforward.

“We appreciate some people will have made honest mistakes, and some may not be fully aware that the rent from a property is taxable, and that is why it always makes sense to talk to us so we can help. It is always cheaper to come forward voluntarily and pay the tax you owe, rather than wait for HMRC to come calling.

“The message for all landlords owing tax is simple – it is better to come to us before we come to you.”


Tax on Selling a Property

If you want to sell a property that isn’t your main home then you may have to pay some tax on it. Our guide looks at when you do and do not have to pay tax when you sell a house or flat.

Selling your own home

You do not have to pay any tax when you sell your own home, providing:

  • The property was your only home whilst you owned it (ignoring the last three years of ownership)
  • You bought it primarily to use as your own home
  • You used it as your home during the time you owned it and used it only as a home for yourself, your family and up to one lodger
  • The garden/grounds do not exceed 5,000 square metres including the site of the house

If you are married or in a civil partnership (and not separated) you and your spouse or civil partner can have only one such main residence between you.

Selling a property that isn’t your main home

If you sell a property for more than you paid for it then you will normally have a ‘chargeable gain’ and you may have to pay tax.

However, in the 2011/12 tax year, the first £10,600 of your total taxable gains are tax free.

Factors that you should take into account when working out the tax payable include:

  • You can deduct some of the costs of buying, selling and improving the property when working out your ‘chargeable gain’ (profit)
  • You can transfer property to your spouse or civil partner without paying Capital Gains Tax (if you are living together)
  • Any loss made on the property could be offset against other chargeable gains you make

You should also bear in mind that if you give property or sell it cheaply to your children or to others, you may be liable to pay Capital Gains Tax.

What paperwork you should keep

HM Revenue & Customs (HMRC) recommends that you keep the following information/documents:

  • Copies of valuations to calculate gains/losses
  • Contracts for sale and purchase
  • Evidence of the costs of purchase, sale or improvements to the property

How Much Is Council Tax?

Council Tax applies to all domestic properties whether you own or rent your home.  Whether you live in a house, flat, mobile home, houseboat or bungalow, you will be required to pay Council Tax.

Council Tax is paid to your local council and goes towards funding local services such as police, libraries, refuse collection and the fire service.

In order to work out how much Council Tax you will pay, you will need to follow a three step process.  Our guide explains how you can work out what Council Tax you will pay.

Step One – Work out which valuation band you’re in

The main factor that determines the Council Tax that you will pay is the valuation of your home.  In England there are eight Council Tax valuation bands based on the value of your home on 1 April 1991.  Your Council Tax is not based on the current value of your home but on the value on this date.

In Wales, your home is put in one of nine valuation band based on the value in 2003.  There are also different valuation bands in Scotland.

The current valuation bands in England are:

  • Valuation band A – up to £40,000
  • Valuation band B – over £40,000 and up to £52,000
  • Valuation band C – over £52,000 and up to £68,000
  • Valuation band D – over £68,000 and up to £88,000
  • Valuation band E – over £88,000 and up to £120,000
  • Valuation band F – over £120,000 and up to £160,000
  • Valuation band G – over £160,000 and up to £320,000
  • Valuation band H – over £320,000

Step Two – Find out what your council charges for your band

Once you have established which valuation band your home is in, you can then approach your local council to establish their Council Tax rate for that band.

Each council decides on its own charging structure and the amount of Council Tax that you will pay will vary from council to council.

Step Three – Work out if you’re entitled to any exemptions

Once you have established what you will be charged for your home by your local council, you can then look at whether any discounts or exemptions to your Council Tax can be applied.

While a ‘full’ Council Tax bill is based on two or more adults living in a household, what you will pay depends on your personal circumstances.

For example, if you are the only adult living in your household you are entitled to a 25 per cent reduction on your Council Tax.  In addition, homes which are occupied only by students in full time education are generally completely exempt from paying any Council Tax at all.

There are a number of reasons why you may be eligible for a discount and you can contact your local council to find out more about these.

What Tax Do You Pay When You Buy A House?

If you are planning to buy a property in the UK then you should be prepared to pay Stamp Duty Land Tax (SDLT) on the purchase.  You pay this tax on the purchase of any house, flat, other building or land above a certain value.

Our guide looks at what Stamp Duty Land Tax is, when you pay it and how much you have to pay.

What is Stamp Duty Land Tax?

SDLT is a tax that you pay on the purchase price of property and land.  It was introduced in December 2003 to replace its predecessor, Stamp Duty.  You may have to pay SDLT when you take on a lease or when you buy a property in the UK.

When is Stamp Duty Land Tax payable?

Generally speaking, you will pay SDLT if you buy a leasehold or freehold property and the purchase price is more than £125,000.

If the property or land you buy is under £125,000, no SDLT will be payable.

If you are a first time buyer then the threshold for paying SDLT is higher.  If you have never owned a flat or house anywhere in the world (including the UK) then you will only pay Stamp Duty Land Tax if the purchase price of the property is over £250,000.  The higher threshold applies for any purchases made between 25 March 2010 and 25 March 2012.

What Stamp Duty Land Tax will I pay?

The amount of SDLT that you pay is dependent on the purchase price of the property:

  • Between £0 and £125,000 – 0 per cent
  • £125,001 to £250,000 – 1 per cent (unless you are a first time buyer in which case the rate is 0 per cent as above)
  • £250,0001 to £500,000 – 3 per cent
  • £500,0001 to £1 million – 4 per cent
  • £1 million or more – 5 per cent

The tax is not staggered.  For example, if you buy for £300,000, you don’t pay 1 per cent on the first £250,000 and then 3 per cent on the remaining £50,000.  You pay 3 per cent of the £300,000 purchase price as SDLT.

What is SDLT Disadvantaged Areas Relief?

If you buy a property in an area that has been designated as ‘disadvantaged’ by the government then you may qualify for Disadvantaged Areas Relief.  This means that you don’t pay any SDLT on a purchase of up to £150,000.

You can determine whether the area you are buying in is deemed ‘disadvantaged’ by checking on the HM Revenue and Customs (HMRC) website.

What if I am buying a ‘zero carbon’ home?

If you are buying a house which has sufficient additional renewable power to cover the average consumption of a property in a year – highly insulated and including renewable energy sources such as solar panels or a wind turbine – you will not have to pay any SDLT on purchases up to £500,000.

Zero carbon homes bought for over £500,000 will have their SDLT bill reduced by £15,000.

What You Should Know About Capital Gains Tax And Your Property

If you own an asset, such as a property, you may face a Capital Gains Tax liability when you sell it.

However, Capital Gains Tax doesn’t apply to all property.  So, our handy guide explains everything you should know about Capital Gains Tax and property.

What is Capital Gains Tax and when is it paid?

Capital Gains Tax is a tax on the profit or gain that you make when you sell or otherwise dispose of an asset.   Disposing of an asset means that you sell it, give it away as a gift, exchange it for something else or transfer ownership of it to someone else.

Capital Gains Tax is paid on the gain that you make between purchase and disposal.  It is not charged on the amount of money you receive for the asset – just the gain.

When you sell or otherwise dispose of property – such as a building, land or lease – you’ll usually have to work out if there’s any Capital Gains Tax to pay.  However, you don’t normally pay any Capital Gains Tax on any gain made on your own main residence (see below).

Property that normally incurs a Capital Gains Tax liability on any gain being made includes:

  • A second home in the UK or abroad
  • A property you bought as an investment
  • Business premises
  • Land

Capital Gains Tax on your own home

As long as you’re entitled to full Private Residence Relief, you don’t have to pay Capital Gains Tax when you sell or dispose of your own home.

You must have used the property as your only or main residence throughout the time you’ve owned it. You may also have to meet other conditions.

Selling or giving your property to family

If you sell, give or otherwise dispose of a property to your spouse or civil partner you don’t pay Capital Gains Tax as long as you’ve lived together for at least part of the tax year in which you made the disposal.

However, if your spouse or civil partner later sells or disposes of the property, they’ll have to work out the tax due.  You should keep a note of what you paid for the property as your spouse or civil partner may need this to work out their Capital Gains Tax liability when they sell or dispose of the property.

If you give away your home, for example to one of your children, you don’t have to pay Capital Gains Tax as long as you’re entitled to full Private Residence Relief.  However, your child may have to pay Capital Gains Tax when they sell or dispose of it.

If you dispose of a property (that’s not your main residence) to any other family member – or to a spouse or civil partner that you haven’t lived with during that tax year – you’ll have to work out the gain or loss made and any Capital Gains Tax due.

Buying and selling property as a business

If you buy and sell property as a business, you pay Income Tax on any profits that you make, not Capital Gains Tax.  Any profits that you make will have to be declared on your Self Assessment tax return.

However, if your property trading business operates as a limited company, profits on the sale of property assets will form part of the company’s profits.  These will then be subject to Corporation Tax.

5 Steps To Filling In A Tax Return For Landlords Of Houses


If you let a property, you will have to declare your income from the letting to HM Revenue and Customs (HMRC).  Most landlords of houses will have to complete a tax return in order to declare their property income.

Here are five easy steps to completing a tax return for all landlords of houses.

1. Work out whether you need to fill in a tax return

Not all landlords of houses need to complete a self-assessment tax return.

If you are employed (or getting a pension through PAYE) and your taxable income from property is less than £2,500, your Pay As You Earn (PAYE) tax code can be adjusted every year to collect the tax on your property income.  You need to ask your Tax Office to send you the form P810 to report your income each year.

If your profit is £2,500 or more or you’re not on PAYE then you will need to fill in a Self Assessment tax return.

2. Work out what type of letting it is

As the rules are slightly different for different types of letting, you will need to determine which type of letting you have.  It will generally fall into one of three categories:

  • Standard residential letting
  • Overseas holiday letting
  • Furnished UK holiday letting

The rules for holiday lettings in the UK and overseas are different to the tax rules for standard rental lettings.  For example, with holiday lettings you can offset losses against all your income (not just property income) and you can claim ‘capital allowances’ for the cost of furniture and fixtures that you provide in the property that you let.

3. Work out your total rental income

Even if you only let one property, HMRC will treat this as a property business.  So, to work out your property income, you should total up the gross rental income you receive from all the properties that you let in the appropriate tax year.

If your total income from UK property in the 2009-10 tax year is under £68,000, you can group the expenses as a single total on your Self Assessment tax return. If your property income is £68,000 or more, you will need to show your expenses separately.

4. Deduct your allowable tax expenses

HMRC allow you to deduct certain expenses incurred through letting property.  These include:

  • Interest on property loans
  • Letting agent’s fees
  • Maintenance and repairs to the property
  • Council Tax and any other utility bills that you pay
  • Buildings and contents insurance
  • Rent, ground rent and service charges

You should deduct these allowable tax expenses from your gross rental income before declaring your rental income to HMRC.

5. Tax return for landlords of houses can be submitted in two ways

If you have to submit a tax return as the landlord of houses, you have two options.  You can do this:

  • Through a paper tax return (deadline is 31st October)
  • Online (deadline is 31st January)


The Top 10 Things You Should Know About House Lettings Tax Returns


Do you let out a property?

If so, you may well have to declare your rental income to HM Revenue and Customs (HMRC).  To help you, here is our guide to the top ten things you should know about house lettings tax returns.

1. You have to declare rental income to HMRC

All income, whether earned through employment or self-employment or that comes from property, savings, investments or pensions has to be declared to HMRC.

2. You don’t always have to submit tax returns for house lettings

You do not automatically have to complete a tax return just because you receive rental income.  If either of the following two statements applies, you won’t necessarily have to complete a tax return:

  • You earn income from property (before deducting allowable expenses) of less than £10,000
  • You earn income from property (after deducting allowable expenses) of less than £2,500

If you are employed, or getting a pension through PAYE, and your taxable income from property is less than £2,500, your tax code can be adjusted to collect the tax that you owe on your property income.

3. There are lots of tax expenses you can claim on house lettings tax returns

HMRC allow you to claim a number of tax expenses which can be deducted from your property income.  Tax allowances that you can claim include:

  • Council tax and any utility bills you pay
  • Letting agent’s fees
  • Interest on property loans
  • Buildings and contents insurance
  • Repairs and maintenance to the property
  • Professional fees including legal fees for lets of a year or less and accountant’s fees

4.  House lettings tax returns are different depending on the type of rental

The rules for declaring rental income depend on the type of letting.  It will normally be:

  • Residential letting (properties let out for people to live in as their home)
  • Holiday letting in UK
  • Holiday letting overseas

5. You need to claim tax expenses in the correct tax year

Make sure that you allocate property tax expenses to the year they apply to. It doesn’t matter when you pay the expenses but it does matter when they occurred.

6. Rules for the ‘rent a room’ scheme are different

If you are letting furnished accommodation in your own home to a lodger and your total receipts are £4,250 or below (£2,125 if letting jointly), you are able to earn this income tax-free under the ‘Rent a Room’ scheme.

7. You can submit house lettings tax returns in two different ways

If you do have to submit a tax return to include rental income you receive, you can do this in one of two ways:

  • Through a paper based tax return (deadline 31st October)
  • Through an online tax return (deadline 31st January)

8. You can’t claim for improvements to a property

Whilst you can claim for essential repairs to a property, you cannot claim improvements to a property (an extension or conservatory, for example) as an allowable tax expense.

9. You have to calculate your rental income

To work out your rental income you should: add up all the rental income you receive from your rental property/properties, add up all your allowable tax expenses and take your allowable expenses from your income.

10. You may not have to break down the expenses on your house letting tax return

If your total property income is under £68,000, you simply include the total figures for income and expenses on your tax return.  You do not have to break these figures down into their constituent parts.