Landlord Tax - what you need to know

30th November 2018

Buying properties with the sole purpose of renting it out has widely become a popular source of income, but what are the tax implications of buying property to let? In this blog we answer some of the common questions surrounding landlord tax and buy-to-let mortgages.

“What should I consider when buying a property to let from a mortgage perspective?”

The most important factor when buying a buy to let is to ensure that you have a good idea of what the rental income is likely to be as this is one of the main factors when lenders assess affordability.

You also will also need to be aware of the higher stamp duty land tax rules which apply.

It is worth noting that the criteria a lender uses can be more flexible on buy to let mortgages than on residential mortgages, so age and income are looked at differently. This is certainly something to consider.

HB&O Financial Services has access to a full range of lenders and can help you identify the best solution for your needs. This is particularly helpful when it comes to limited company house purchases, house in multiple occupation (HMO) lending, and student lets, as these types of investments are traditionally harder to secure mortgages against.

‘I have secured a mortgage and have tenants in my property, how do I tell HMRC about this rental income?

If you already complete self-assessment tax returns, the answer is easy. Simply include the information on the land and property pages of your tax return for the year when your rental activities started.

If you do not currently file tax returns, you should notify HMRC by 5 October following the first tax year that your property has generated either a profit in excess of £2,500 or gross rents exceed £10,000. HMRC will then issue you with a notice to file a tax return.

If we are acting for you, we can deal with all the admin on your behalf, but if you wish to notify HMRC yourself, you will need to download and complete form SA1, available from the GOV.UK website.

“I’m making a loss – do I still need to declare this to HMRC?”

The first thing to establish in thiscase is ‘has a taxable loss as well asan economic loss been made?’ Aneconomic loss is made if you spendmore money than you receive –typical in the early years of propertyinvestment because of initial purchasesor repairs. However, the rules fordetermining tax deductible expensesare complex. Some costs incurredmay not be deductible against rentalincome when determining whetherthe business has made a taxable profitor loss.

Examples include:

  • The capital element of monthly mortgage repayments
  • 50% of mortgage interest (75% from April 2019 and 0% from April 2020)
  • Initial cost of furniture and white goods
  • Property improvements and initial repairs required to make the property fit for purpose
  • Costs of acquiring the property. Typically, the highest ongoing expense is the mortgage repayments, but with only 50% of the interest element allowable to determine profits and losses it’s easy to see why an investment making an economic loss can make a taxable profit!

A number of changes have been made to the way property investments are treated from a tax point of view in recent years, some of which are still being phased in and will affect your tax calculations going forward. To make sure you are fully compliant and not paying more tax than you need to, take professional advice early-on.