Here are some of the main points to be aware of regarding buy to let tax…
- The income is treated as the profits of a Property Income Business. If the owner of the property is an individual or a trust the profits are charged to income tax for the tax year to 5th April. If the owner is a company the profits are charged to corporation tax for the accounting period of the company. Although letting property is generally regarded as an investment activity, the accounting rules for working out trading profits are applied. Allowable expenses are broadly those whose benefit is only felt in the immediate period, and do not affect more than one year. The costs incurred must also be wholly and exclusively for the purposes of the letting. So for example, an adjustment must be made where there is a private element of the expenses. Interest payable on a loan to acquire or improve the property is allowable.
- Capital allowances are not available on plant and machinery used in dwellings. However, owners of furnished properties can claim a wear and tear allowance of 10% of the net rents to allow for the cost of replacing furnishings, etc. Net rents is the rent less any expenditure that would normally be incurred by the tenant, such as heat and light. This is normally the best option although it is possible to claim relief for furnishings and fittings on a renewals basis whereby no relief is given for the original cost but full relief is given for the replacement cost when that occurs.
- The cost of repairs can be set against the rental income, but it is often difficult to distinguish between repairs and improvements. Where a fixture is replaced with a similar fixture this will usually be an allowable deduction as a repair but where a new fixture is installed where one did not exist before or the size or quality of the replacement fixture represents an improvement in the value of the property no tax deduction is given against the rental income. The tax relief for improvements is given when the property is sold.
- Landlord’s Energy Saving Allowance – landlords that incur capital expenditure up until 5th April 2015 to install loft insulation, cavity wall insulation or floor insulation in residential property may claim a deduction against rental profits of up to £1500 per property.
- The expenses and income of different properties owned by one person in the UK are pooled together in any one tax year, to reach an overall profit or loss for the letting business. Any overall loss is normally carried forward to set against later rental income. However, relief is available for excess capital allowances to be set against other income of same and/or following year.
- When the property that is let is situated abroad the calculations of taxable income are very similar, but tax may be payable in the country where the property is situated, as well as in the UK.
- Where the landlord of a UK property is non resident, basic rate tax should normally be deducted at source from the net rental income by the letting agent or by the tenant, unless HMRC have agreed that the landlord will complete a self-assessment tax return in the UK.
- There are special advantageous rules which apply to properties which qualify for furnished holiday lettings.
- Capital gains buy to let tax rates are 18% or 28%.
How We Can Help You With Your Buy To Let Tax
There is no substitute for specific advice in your own situation when it comes to buy to let tax. Please contact us.
An individual is normally exempt from capital gains tax on property sold which was the individual’s home, with neither a taxable gain or loss arising. This is certainly the case where it has been the individual’s only or main residence throughout the period it has been owned, or if owned prior to 31 March 1982, then the period since then.
However there are times when a taxable gain or loss can arise on the property. For example the profit arising on disposal may be taxable or partly taxable in any of the following situations…
- Where the individual (both spouses/civil partners who are treated as one for these purposes) has two or more residences. In these circumstances the individual can elect within 2 years of acquiring the second property as to which property is to be treated as the only or main residence and therefore exempt from Capital Gains Tax UK. The property chosen must be a residence of the individual, i.e. it must be lived in as a home for some part of the year, although it does not have to be the main residence as a question of fact as to which property is the main residence. It is possible to change the election at any time after it is made, and can be back-dated for a period of up to 2 years to the date when the second property started to be used as a residence.
- The property has been let out whether fully or partly. There is no problem with a lodger if they live as part of the family and individual still occupies the property but other than that, the part of the gain apportioned to the letting period is taxable but is reduced by the lower of…
- £40,000 and
- an amount equal to the exempt gain
- There has been business use of the property. However, entrepreneurs’ relief may be available on this proportion of the gain and it also doesn’t apply if no part of the residence has been used exclusively for business purposes, so it’s possible that storing your golf clubs in your office may do the trick!
- The property is bought for a short time, lived in and then sold in order to make an exempt gain. To take advantage of the exemption for a private home that the property is bought for the purposes of residence and not for making a gain. There is no fixed time period during which the home should be occupied, as it is the intention that counts. In addition if properties are bought and sold on a regular basis there is a very real danger HMRC will want to treat the repeated profits as income from a trade, subject to income tax and national insurance and not just a Capital Gain on property.
- The garden is larger than half a hectare (approx 1.25 acres) and is out of keeping with the particular size and character of the property. In other words it more than would be needed to occupy and enjoy the property based on current living requirements, not the requirement for land as existed when the property was built.
- The garden (whatever the size) is sold after the residence has been sold, this would then be taxable.
Periods of absence. When the property is not occupied as the taxpayer’s main home any gain that arises in those periods of absences is potentially taxable. However f some periods of absence are not chargeable, with only the excess of following periods being chargeable…
- The last 3 years of ownership as long as the property was the only or main residence at some point prior to that;
- Up to 3 years for any reason – such periods do not have to run continually as long as it was the only or main residence at some time before and after;
- Where a previous residence is being sold, or the property is being prepared for occupation, up to a year (occasionally 2 years) is treated as it is were a period of residence;
- Up to 4 years where the duties of a United Kingdom employment require the individual to work elsewhere, again as long as it was the only or main residence at some time before and after unless prevented from doing so by the work;
- Any time when employed abroad as long as it was the only or main residence at some time before and after unless prevented from doing so by the work;
- Periods of absence prior to 31 March 1982 are ignored in calculating the chargeable gain;
- Where there is job-related accommodation related to employment such as minister of religion or public house tenant, you can purchase a property while working and living in that job related property, for the purpose of being your future home but not live there and that property will be exempt from Capital Gains Tax, even if you never live there, so long as the intention to do so was there until sold.
Dependent Relative Relief for pre 5th April 1988 properties. Where the property is owned on 5th April 1988 that has been continuously occupied rent free by a dependent relative since then, the property becomes exempt from Capital Gains Tax on property. This exemption ceases if there is a change of dependent relative occupier.
How We Can Help You
The Capital Gains Tax treatment of the sale of the family home can be complex and planning in advance can greatly assist the outcome. Please contact us for further advice.