How much property tax does a landlord pay?

Simon Misiewicz

Expat & Property Tax Specialist

29th October 2021

How much tax does a landlord pay? What are the allowable rental expenditure to reduce tax?

The amount of tax paid is subject to your property profits, which are based on gross rental income less allowable expenses. Property tax is often overpaid to HMRC as property investors are unaware of the many tax reliefs available. There are many expenditure types that help you obtain tax relief.

If you pay the basic tax rate, this is 20% (earnings up to £50,270), while in a higher rate taxpayer, you will pay 40% (earnings from £50,271 to £150,000). The additional rate bracket will means you pay 45% tax on earnings above £150,000).

Expenditure that HMRC allows is often missed by property investors hence they move from a basic rate tax band to a high rate tax band. One of the reasons that property investors do not claim these tax allowable costs is because of their accountant. General accountants may be risk-averse and may not want to risk HMRC making an enquiry because an item of expenditure was high value. Therefore these allowable costs to reduce income tax are entered as capital, missing out on the much-needed tax reliefs.

You need to be aware of three main tax types: income, National Insurance and VAT. Buy-to-let tax can be reduced and often mitigated altogether.

Letting out one or two properties while in full-time employment often only need you to pay income tax on the profit from renting a buy-to-let property to tenants. It is vital to keep track of your gross rental income and expenses using online software. HMRC may make an enquiry into the allowable costs and expenditure lines. Having an online accounting system with a physical receipt/digital receipt will keep HMRC at bay.

A full-time investor must declare this to HMRC if starting a property business. Property tax rules are different in a company-based structure.

HMRC has provided clear information on how to work out your rental income when you run a buy-to-let business.

One of the questions we are asked is, “Do I need a property accountant near me” to work this out. I would say no. This is because we use Zoom as a great way to help you get answers. We are on hand remotely to share with you what rental costs are allowable and what items of expenditure are capital in nature.

What are the basics of buy-to-let tax?

As accountants serving thousands of landlords that purchase buy-to-let properties, we know that property tax is one of our investor clients’ main concerns. This is why it is important to keep track of your tax allowable rental costs and expenditure items with sound advice from a rental business accountant.

Ensuring that their investment portfolios are as tax-efficient as possible is our main objective as specialist accountants serving clients across the UK and abroad.

Whoever benefits from owning a buy-to-let investment pays the tax.

Finding that person means following the income and dividing it between owners (or those paid from it), such as lettings managers.

Suppose you are letting out a buy-to-let and allowing a third party to keep the income for managing the property. In that case, you may still need to declare this on a self-assessment even though you were not receiving any rental income.

For self-assessment, all rents and rental expenditure/costs from similar properties are combined into a single figure.

Landlords need to divide properties, rents and rental costs in the following way:

– UK rentals – any buy-to-let or share house rented out on a shorthold tenancy agreement
– Overseas rentals – any properties abroad let on a long lease
– Holiday lets – homes located within the EEA that qualify as furnished holiday lets

We recommend that all investors review what HMRC expects landlords to do from a tax perspective when renting out their buy-to-let assets. HMRC have clear guidance on what rental expenditure is allowed to be offset against your rental business. Claiming tax allowable costs ethically and legally is one way to ensure you minimise your tax liabilities.

Always ensure you keep your receipts (physical/electronically) for all items of expenditure so that you can prove these tax allowable rental costs to HMRC upon an enquiry.

Buy to let allowable costs/expenditure - Revenue or Capital? How to reduce tax legally

Rental allowable expenses on rental can be categorised in one of 2 ways to help mitigate property tax being made to HMRC. These are:

– Revenue allowable rental costs/expenditure (that can be used to reduce your buy to let profits as allowable expenses on rental profits).

– Capital costs/expenditure (that can be used when you sell the buy-to-let and can be set against the amount of gain made to reduce your capital gains liability).

HMRC’s website states that allowable rental expenditures on rental refurbishment are permitted, provided the property is in a lettable state. HMRC’s website says, “A buy to let acquired that wasn’t in a fit state for use in the business until the repairs had been carried out or that couldn’t continue to be let without repairs being made shortly after acquisition.”

A landlord may incur expenses for a rental business before that business starts. If so, they may be able to claim deductions on rental once the letting begins (ITTOIA05/S57 or CTA09/S61). Relief is only due under these special rules where:

– rental expenditure is incurred within seven years before the date the rental business is started, and

– rental costs are not otherwise allowable as a deduction for tax purposes, and

– rental expenditure it would have been allowed as a deduction if it had been incurred after the rental business started.

Refurbishment costs/expenditure will be considered capital if you cannot get a buy-to-let mortgage. This is an excellent signal to suggest if the buy-to-let is dilapidated or in a lettable state. Suppose the property is in a  lettable, then HMRC will see like-for-life repairs/replacement as allowable to be offset against your profits. If the property does not have a buy-to-let mortgage, this tells HMRC that the buy-to-let is dilapidated and that refurbishment costs are capital.

Buy-to-let tax may be deferred for many years whilst generating an income due to the carry forward of losses due to the three R expenses.

Allowable expenditure/costs on rentals to reduce your profits

Three types of rental allowable expenses will be offset against your profits. These allowable refurbishment costs will reduce the tax that you pay to HMRC. The three Rs are:

– Replacement expenditure (kitchens, bathrooms and furniture)

– Repairs costs (roof tiles, garden fence, brickwork)

– Renewals expenses  (replastering, repainting)

The above expenditures are all allowable expenses on rental income to minimise tax.

Let us take a buy to let that you have purchased. It is a property that has not been renovated for many, many years. You know the types of property that have:

– The beautiful woodchip wallpaper (allowable rental expenditure to reduce tax)

– The stunning salmon bathroom suite (allowable rental costs to reduce tax)

– Furniture that looks as though it was leased from a museum. Yes, people still watch black and white TVs

A note on Stamp Duty allowable expenses on rental income

Identifying fixtures/fittings and furniture = chattels means you do not pay

£200,000 buy to let value

£10,000 (F/F and F = settee, tables, freestanding kitchen appliances
etc.) £190,000, which is used for SDLT purposes, not the £200,000 thus saving SDLT.

– The kitchen sink that resides in a bedroom wardrobe (yes, this happened to me)

Landlords know that properties would not achieve high rental if in a poor state.

As such, you would replace the kitchen and bathroom suites and these landlord allowable expenses are permitted if they are like-for-like replacements (same number of cupboards and functionality). As such, these items would be considered tax deductions.

Once you have replaced these items, you may focus on the decoration. You can claim 100% of the tax deductions if you renew the paintwork and plasterwork to make them look shiny and new. The same applies to the replacement curtains, carpets and furniture mentioned before. I am sure you can already see there are many landlord allowable expenses.

There are times when it would appear that improvements have been made to a buy-to-let. Many accountants would capitalise on these costs as HMRC’s website says, “alterations due to advancements in technology are generally treated as an allowable expense on rental income rather than an improvement if the functionality and character of the asset are broadly the same. For example, when single glazed windows are replaced with double glazing.”

If you replace boilers, plumbing, and wiring, these landlord allowable expenses will reduce your profits.

We will repeat the importance of keeping receipts to back up as evidence that the expenditure incurred is an allowable rental cost to reduce tax.

How much tax do I pay on rental profits?

When renting to a tenant, landlords pay tax on any profit from the rental earnings that goes over the personal allowance of £12,570 for the 2021-22 tax year.

The amount of tax a landlord pays depends on their total earnings.

Landlords calculate profits by adding rental earnings and deducting any allowable expenses from this total.

HMRC classes other landlord allowable expenses as:

– Rent money paid by tenants
– Utility allowable costs
– Fee for cleaning communal spaces
– Parking fees
– Additional fees for the use of furniture

It does not include money from services not usually provided by landlords, such as meals, cleaning, or laundry services.

When calculating rental profit, you can put rental receipts and expenses together so landlord expenses can be claimed against another’s income.

The tax rates for the 2021-22:

– Higher rate tax band (£50,271 to £150,000) = 40%
– Additional rate taxpayer (over £150,000) = 45%

So if you earn £15,000 from renting out a buy to let, the first £12,570 is tax-free.

You would then pay 20% tax on the remaining £2,430, giving you a bill of £486.

Let Property Campaign

You may have realised that you have rental earnings that have not been disclosed to HMRC. Fear not. You can report to HMRC that you had rental income in the past. The let property campaign allows landlords to submit multiple years of data to HMRC on one form.

HMRC's £7,500 Rent a Room Scheme

It is possible to earn tax-free money from HMRC from your home. Many homeowners rent a room and earn £7,500 tax-free. This is allowed under HMRC’s Rent-a-room allowance. Using the rent-a-room scheme means that you forgo the opportunity of using rental costs/expenditure to reduce your property profits. This is because HMRC does not allow these costs when using the rent-a-room scheme.

Deed of trust on property to reduce property tax

It is possible to allocate property earnings between spouses to be tax efficient. This is done using a declaration of trust also known as a deed of trust on a property document. Please note that the costs of using a deed of trust to split the rental may be considered a rental allowable costs, meaning this type of expenditure will help you reduce your tax.

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