Understanding ‘Buy-to-Let’ tax implications

How Does Renting a Property Impact My Income Tax?

All rent received, including any non-refundable deposits or additional payments from tenants for services like cleaning, repairs, or utilities, is considered income and must be declared. This also applies to any amount retained from a returnable deposit at the end of a tenancy.

Rental income is taxed at the same rates as other income you earn, which can be 0%, 20%, 40%, or 45%, depending on your tax bracket. If the rental income pushes you into a higher tax bracket, this could increase your overall tax liability. It’s important to declare rental income for the tax year it’s due, regardless of when you actually receive the payment.

When it comes to expenses, you can deduct allowable expenses related to the rental property for the tax year in which they were incurred, even if the payment for these expenses happens before or after the end of the tax year.

Landlord Tax Relief

Prior to April 2017, private landlords could deduct mortgage interest payments from their rental income before calculating the tax owed. However, since the 2017-18 tax year, this system has been phased out. From 2020, landlords could no longer deduct mortgage interest payments from rental income. Instead, they received a 20% tax relief on the mortgage interest.

For landlords in higher tax brackets, this change means potentially paying more tax than before. They now pay tax on the full rental income rather than the rental income minus mortgage interest payments.

Will I Pay Capital Gains Tax on Property?

Selling a buy-to-let property typically incurs capital gains tax (CGT) on the gains made from the sale, not the sale price itself. If you've rented out part or all of the property, a proportion of the gain could be taxable when you sell it.

Basic-rate taxpayers are currently (in the 2024-25 tax year) charged 18% on gains from sales of residential property, while higher and additional rate taxpayers pay a rate of 24% on residential property. In the 2024-25 tax year, individuals could make tax-free capital gains up to £3,000, and couples jointly owning assets could combine their allowances for a total of £6,000.

Anyone making a taxable capital gain from UK residential property must pay the tax within 30 days of the sale’s completion. This requires submitting a 'residential property return' and making an immediate payment on account.

Letting Relief

If you used to live in your rental property, you might be eligible for letting relief, which can reduce your capital gains tax bill. This relief is beneficial for those who transition their homes into rental properties and eventually sell them.

Key Points for Landlords

  1. Declare All Income: Ensure all rental income, including additional payments, is declared for tax purposes.
  2. Understand Deductions: Keep track of allowable expenses and when they can be deducted.
  3. Stay Informed on Tax Reliefs: Be aware of changes in tax reliefs, especially concerning mortgage interest.
  4. Plan for Capital Gains Tax: Understand the implications of capital gains tax when selling a buy-to-let property and take advantage of available reliefs.
  5. Meet Deadlines: Adhere to deadlines for paying capital gains tax, especially under the new 30-day rule post-sale.

Seeking Professional Advice

Navigating the intricacies of tax on buy-to-let property can be challenging. It's advisable to consult with a tax professional or an experienced estate agent who can provide tailored advice based on your specific circumstances.

At Haybrook, we understand the complexities of property taxation and are here to help. Whether you need detailed guidance on buy-to-let property tax, want to optimize your tax strategy, or seek assistance with managing your rental properties, our team is equipped to support you.

For more information on how we can assist you with the tax implications of letting a property, contact Haybrook today. Let us help you make informed decisions and manage your rental investments effectively.