In our Buy to Let Guide, we look at the pros and cons of letting out residential property in the UK (including furnished holiday accommodation) for the tax year beginning 6 April 2021. We do not cover the letting of commercial property in this guide but are happy to advise on that area of investment on an individual basis.
Here is an introduction to Buy to Let and the implications along with a summary of the detailed information which can be found in the full guide.
Different taxes apply to the purchasers of property in different parts of the UK:
Stamp Duty Land Tax (SDLT) in England and Northern Ireland, Land and Buildings Transaction Tax (LBTT) in Scotland and Land Transaction Tax (LTT) in Wales. Each tax has its own thresholds and rate bands. The LBTT nil rate band is £145,000.
If you buy a second home for £40,000 or more, which is not a replacement for your main home, you must pay a land tax supplement on the entire purchase price. For SDLT and LTT this is an extra 3% and for LBTT it is an extra 4%.
If you buy your residential properties through a company, that company must pay the 3% or 4% land tax supplement on all purchases of over £40,000. Where the residential property is acquired in England or Northern Ireland for more than £500,000, the company may have to pay SDLT at 15% if it does not intend to use the property for a commercial or charitable purpose. In addition, where a company holds a residential property located anywhere in the UK, which is not commercially let to an unconnected tenant or acquired for development, it may have to pay the Annual Tax on Enveloped Dwellings (ATED). This annual charge starts at £3,700 for 2020/21 and applies to properties acquired for more than £500,000, or which were valued above that level on 1 April 2017. Higher value residences can attract significantly higher charges.
From 1 April 2021, any non-resident buying UK residential property in England or Northern Ireland will normally have to pay a further 2% SDLT supplement. There are different definitions of non-residence for SDLT purposes compared to normal statutory rules, so it is possible for an individual or company that is otherwise UK resident to be subject to the supplement.
What are you taxed on?
As an individual landlord you must pay income tax on your ‘property income’. This is the sum of the rents you receive less the tax-deductible costs. Property income does not include the profit you make when you sell the property and does not take into account any costs of buying, selling or improving the property.
All of the income you receive from letting property in the UK, both residential and commercial, is combined and taxed as one property investment business. A loss on one property can be relieved against profits made from another in the same tax year or in later years. Overseas property and furnished holiday lets are treated as separate businesses.
Here is a summary of our BUY TO LET GUIDE, click here to download full comprehensive document.
Ownership by an individual
If you hold the let properties in your own name, you will be taxed on the income and gains arising from those properties. You can’t transfer the income before tax to another person without first transferring an interest in the property to that person…………see more in the guide
Where a let property is held in the joint names of a married couple or civil partners, it can provide a useful income stream if one of the couple has little or no other income………….see more in the guide
Ownership by limited company
A limited company pays tax at 19% on its income and capital gains, although from April 2023 this rate is due to increase to 26.5% or 25%, when profits exceed £50,000 and £250,000 respectively. In contrast, most individuals pay tax on rental income at rates between 20% and 45% (19% and 46% in Scotland). Individuals also pay Capital Gains Tax (CGT) on residential property gains at 18% or 28%.
Once you have acquired your first property and it is available for letting, you need to start identifying the costs that are deductible from the rental income…………see more in the guide
You need to sort your expenses into categories of ‘capital’ costs connected with buying, selling or improving your properties and other costs that reoccur as the tenants change, known as revenue expenses………………see more in the guide
From 2020/21, none of the finance charges (such as loan interest and arrangement fees) you pay in respect of your let property are deductible from rental income, other than residential finance cost relief at a rate of 20%. This applies if you let residential property as an individual or jointly with other individuals, but companies can deduct all finance costs. There are different rules for furnished holiday lettings………………see more in the guide
You must keep adequate records to enable you to report your profits or losses accurately to HMRC, without recourse to estimates. You should retain a record of every relevant expense………………see more in the guide
If you let your furnished property for a large number of short periods, it could qualify as a Furnished Holiday Letting (FHL)………….see more in the guide
Conditions for FHLs
The property must be let for short periods, of no more than 31 days each, on a commercial basis to the general public (not just to family and friends)…………………..see more in the guide
The profits and losses for an FHL business are calculated in a similar way to those for an ordinary lettings business, but losses can only be set against other FHL profits……………..see more in the guide
Selling the property
Your property letting business finishes when you no longer have any properties available for rent and are not looking for tenants…………see more in the guide
When you sell your let property, you would expect to make a profit, after deducting allowable costs (see below). Gains made from selling residential property, which are not covered by an exemption or other relief, are subject to CGT at 28%, except to the extent that the seller has basic rate band available, when the rate is 18%.
When you live in a property, the gains made relevant to your period of occupation are exempt from CGT on disposal of the property. Other periods you spend away from the property may qualify as deemed periods of occupation if you return to live there at a later date – the detailed rules on this are very complicated!
If you live outside the UK and let property located in the UK, your letting agent (or tenant where there is no agent) should deduct 20% tax from the rents before paying you. However, where HMRC agrees that you qualify under the non-resident landlord scheme, you can receive the rental income without tax deducted……………see more in the guide
The value of all your possessions, including the home you live in and your buy-to-let properties, are all potentially subject to Inheritance Tax (IHT) on your death. However, the first £325,000 (“nil rate band”) is effectively exempt from IHT, and any unused nil rate band may be inherited by your spouse or civil partner. There is an additional residential nil rate band of £175,000 per person that can be deducted if you leave the value of a home to one or more of your direct descendants, but this is not available if the property has always been rented out. Any unused amount is also transferrable to a spouse or civil partner. There are exemptions for gifts made more than seven years before you die and amounts left to your spouse/civil partner or to charities. It is essential to have a well-drafted and up-to-date Will to take full advantage of IHT exemptions and reliefs.
For your copy of our BUY TO LET GUIDE, click here to download full comprehensive document.