Buy to Let Tax Issues

Tackling the tax take!

If you are a buy-to-let landlord, you know that not only do you have to deal with tenants but also with HM Revenue & Customs (HMRC). Any rent earned from buy-to-let residential property is treated as income for tax purposes and therefore needs to be declared on your tax return. However, as landlords can offset certain expenses against the rent, you may be able to reduce the size of your tax bill.

You need to inform HMRC by 5 October after the tax year in which you first get the income. The principle is that you are running a small lettings business, and tax is payable on income less expenses. The biggest cost for many landlords is typically the buy-to-let mortgage payments, and while interest can be set against the rent, capital repayments cannot. If you opt for an interest-only loan, you can therefore deduct the whole of the mortgage payments from the rent for tax purposes.

You cannot deduct the costs of buying the property in the first place, but you can deduct the costs of keeping it going, such as agent's costs for finding tenants and managing the property, any insurance costs, utility bills between tenants and running costs of repairs and repainting. You can claim tax relief on rents that do not get collected because the tenant defaults, and legal costs for pursuing the tenant. The cost of capital improvements as opposed to running expenses cannot be used to cut your tax bill.

For a simpler alternative, rather than getting tax relief when buying the items in the first place, you could deduct 10 per cent from the net rent each year as 'wear and tear allowance'. Net rent is calculated by deducting from the total rent any bills normally payable by the tenant, but which the landlord ended up paying, such as council tax and water bills when the property is empty.

When you come to complete your self-assessment tax return, as a buy-to-let landlord you will need to fill in SA105, the Land and Property pages, based on the rental income and expenditure. Landlords who make a profit should set aside money to cover an eventual tax bill, due by 31 January after the tax year in which the rent was received. So for the previous 2006/07 tax year, tax would become payable on or before 31 January 2008.

Tax is due at your highest income tax rate. Once up and running, you may end up having to make payments on account in advance.

What happens if, after you have deducted allowable expenses from the rent, you end up with a loss? You can carry losses forward against next year or the subsequent year should you make a profit on your buy-to-let – but what you cannot do is take the loss against other income or carry it back.

If you require any further information about the services that we provide or would like to review your financial planning position, please email or contact us.

Levels and bases of, and reliefs from, taxation are subject to change.
Article date: 08.07