Buy To Let Tax Tips February 16, 2019

 

 


Article relevant to the tax year 2019/20

Buy to let tax tips for UK landlords by our property accountants

What buy to let tax needs to be paid as a property investor? I feel that this is a good place to start by asking this question. After all, this is what our property accountants are asked each time they speak with clients.

– What is a property tax specialist and what is the difference compared to a property accountant?

– Stamp Duty Land Tax (SDLT) when buying a property investment

– Value Added Tax (VAT) when buying a commercial building, even if you wish to convert it into a residential building

– Value Added Tax (VAT) on the materials and labour for any refurbishment works

– Income tax or corporation tax liabilities on the property profits

– Capital Gains Tax (CGT) when you look to sell a property investment

– Inheritance Tax (IHT) when you die

Difference between property accountants and property tax  specialists 

You could argue that there are no real differences between property accountants and property tax specialists. After all, they both focus on property profits that lead to buy to let tax. Surely they do the same job.

The role of Property accountants for landlords

Property accountants in our firm are very much focused on their accounting qualifications. They will start with their Association of Accounting Technicians (AAT), see their website for more details. They will then progress towards their  Association of Chartered Certified Accountants (ACCA) qualifications, see their website for more details.

Property accountants focus very much on compliance work. Examples being self-assessment tax returns for landlords and medics. They will also prepare and submit limited company set of accounts with property investors and locum doctors.

A lot of work carried out by the property accountant is historical. The numbers involved in the tax return is very much in the past. Albeit there are a lot of suggestions of how property tax may be mitigated in the future.

The role of property tax specialists for landlords

Our property tax specialists (also known as lead accountants) focus their efforts on the review of self-assessment and limited company accounts. This is very much the same focus as the property accountants mentioned above.

The key difference is that our property tax specialists will focus their education on the Association of Taxation Technicians (ATT) qualifications, see website for more details and Chartered Institute of Taxation (CIOT), see their website for more details.

Our property tax specialists will start their careers as a property accountant and may wish to progress their careers with Optimise Accountants as property tax specialists. Their focus is very much about tax planning with landlords to reduce buy to let tax. They spend no time in preparing accounts. This is the job of the property accountants.

As property tax specialists they will speak with clients on their 30-minute tax consultation calls. These calls are used to reduce buy to let tax in many different ways, which are legal.

Buy to let tax – the basics and how to mitigate it

 

Stamp Duty Land Tax (SDLT) when buying a property investment

Stamp Duty Land Tax is a tax that you will pay when buying a property. There are different rates that apply based on the type of property that you buy

– Residential property investments

– Commercial property investments

Stamp Duty on Residential property investments

Stamp Duty Land Tax on residential properties will start from £125,000. However, you will also pay a 3% Stamp Duty Land Tax charge if you already own a property in your own name. You will also pay this 3% Stamp Duty Land tax charge if you buy a property investment inside a limited company. The 3% Stamp Duty Land Tax surcharge will apply irrespective if the limited company already owns a residential property investment.

Property or lease premium or transfer value SDLT rate
Up to £125,000 Zero
The next £125,000 (the portion from £125,001 to £250,000) 2%
The next £675,000 (the portion from £250,001 to £925,000) 5%
The next £575,000 (the portion from £925,001 to £1.5 million) 10%
The remaining amount (the portion above £1.5 million) 12%

Please remember that you will also have to pay the 3% Stamp Duty Land Tax in certain circumstances. Therefore, the top Stamp Duty Land Tax rate is 15% on properties that have a value of £1.5m or more.

If you wish to know how Stamp Duty Land tax on residential properties may be reduced please see our extensive article. If you are a property developer then you need to know that Stamp Duty Land Tax as a developer may be mitigated altogether. You can read more about this in our other article

Stamp Duty Land Tax on non-residential property investments

Fortunately, there is no 3% Stamp Duty Land Tax surcharge for non-residential / commercial properties.

Non-residential property includes

– shops or office

– agricultural land

– 6 or more residential properties bought in a single transaction

A ‘mixed-use’ property, for example, is a flat connected to a shop, doctor’s surgery or office.

Property or lease premium or transfer value SDLT rate
Up to £150,000 Zero
The next £100,000 (the portion from £150,001 to £250,000) 2%
The remaining amount (the portion above £250,000) 5%

Download your buy to let tax guide here, written by our property accountants

Value Added Tax (VAT) when buying a commercial building, even if you wish to convert it into a residential building

When you are buying a property investment you may not be aware that you may have to pay Value Added Tax. This is the case if you buy a commercial building such as an office or a shop and the property owner has opted the building to tax.

If you buy an office to potentially convert it into a residential dwelling then there could be a Value Added Tax charge as we will see in the below example:

£100,000 property purchase value

£20,000 Value Added Tax

£120,000 Total cost

This may be a surprise to you when being asked to stump up the extra £20,000. You also need to be mindful that that Stamp Duty Land Tax is applied to the total purchase price. Example:

£200,000 property purchase price

£40,000 Value Added tax

£240,000 Total purchase price

We can look at the non-residential Stamp Duty Land Tax rates from the above table. The Stamp Duty Land Tax charge on a property of £240,000 is 2% on the difference between £240,000 and £150,000. This being £90,000 X 2%. The Stamp Duty Land Tax charge is £1,800

£200,000 property purchase price

£40,000 Value Added tax

£240,000 Total purchase price

£1,800 Stamp Duty Land Tax

£241,800 total purchase price

From the above, we can now see that the cost of buying a non-residential building with Value Added Tax will cost you a lot more than you could have anticipated. If you wish to know how to remove Value Added tax when buying a property investment please read our article.

 

Join our FREE tax webinar

Value Added Tax (VAT) on the materials and labour for any refurbishment works

You may have to pay Value Added Tax on the refurbishment costs of your property investment. The Value Added Tax will be on

– 20% Value Added tax on materials to be put into the property investment

– 20% on Tradespeople costs if they are VAT registered.

It is worth asking your tradesperson if they are registered for Value Added Tax. If they are then your refurbishment costs will be increased by 20%. Tradespeople need to register and charge Value Added Tax once they have a turnover of £85,000 in the last 12 calendar months

For the majority of property investments, it is impossible to claim back Value Added Tax. The reason for this is because residential rent is Value Added tax exempt. You do not charge Value Added tax on the rent that you charge to tenants. You cannot claim Value Added Tax Tax on the refurbishment works of your property investment for this reason.

There are exceptions to the above. If you are buying to sell properties it is possible to claim back all the Value Added Tax charged. You may also get a reduction of Value Added Tax from 20% to 5% dependent on the type of property that you invest in. For more information of how Value Added Tax may be reduced on your property investment please visit our other article

Income tax or corporation tax liabilities on the property profits

You will need to pay either income tax or corporation tax on the property profits made. Income tax is charged on property investments if they are owned in your personal name. Corporation tax is paid on the property profits when they are owned in a limited company.

Property profits will be computed as follows:

£10,000 rental income

£3,000 mortgage interest

£2,000 refurbishment costs

£1,000 letting agents costs

£4,000 taxable profits

There are different types of refurbishment costs that you will incur It is important to know what costs are tax deductible. We have discussed allowable costs in our other article. If you identify enough tax-deductible costs it is possible not to pay property tax at all.

Tax rates for property investors

Corporation tax on property profits made in a limited company is charged at 19%.

Income tax for individuals that make a profit from their property investments is a little more complex.

Band Taxable income Tax rate
Personal Allowance Up to £11,850 0%
Basic rate £11,851 to £46,350 20%
Higher rate £46,351 to £150,000 40%
Additional rate over £150,000 45%

Section 24 mortgage interest relief 

HMRC have introduced a new piece of legislation called Section 24 mortgage interest relief. Previously individuals that owned property investments were allowed to offset 100% of their mortgage interest costs. With Section 24 mortgage interest relief cap this will no longer be allowed. Mortgage interest will not be tax deductible from 2021. For more information about Section 24 mortgage interest relief cap please read our extensive article.

Capital Gains Tax (CGT) when you look to sell a property investment

When you dispose of a property investment you will need to pay Capital Gains tax. The gain is computed as follows:

£200,000 net sales price (inc legal/agents fees and selling fees)

£100,000 purchase price

£100,000 Capital Gain

Capital Gains Tax Annual Allowances

Every individual is allowed a Capital Gains annual allowance. These are as follows

2015 to 2016 2016 to 2017 2017 to 2018 2018 to 2019 2019 to 2020
Capital Gains Tax annual allowances £11,000 £11,100 £11,300 £11,700 £12,000

This means that the taxable gain from above is reduced

£100,000 capital gain from above

£12,000 capital gain annual allowance

£78,000 taxable capital gain

Capital Gains Tax rates for individuals that own residential property investments

The Capital Gains Tax rates are as follows:

18% for basic rate taxpayers

28% for high rate taxpayers

If the above person was a high rate taxpayer then the tax would be as follows

= £78,000 X 28%

= £21,840

We have always said that Capital Gains Tax is optional. It does not need to be paid and there are many ways of how you can reduce Capital Gains Tax when selling an investment property. Please read our article of how you can immediately reduce your Capital Gains Tax liability

Capital Gains Tax rates for limited companies that own residential property investments

Capital Gains Tax in a limited company follows the standard corporation tax rules. Therefore profits on disposing of a property investment are taxed at 19%. Please note that limited companies do not benefit from the annual Capital Gains allowances.

How can our property accountants help you reduce your buy to let tax?

Book a call to discuss our property accountancy services – Click Here to book

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