Taxation rules for landlords

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Income tax

When you start letting property, you must inform HMRC so you can start paying income tax. Failing to pay income tax will result in penalties. If there are previous years for which you owe income tax, you should initiate contact with HMRC on your own. This may result in a more favourable decision. When you make a profit from rental property, this is considered income and is therefore subject to income tax. Your total taxable income, taking into account your various revenue streams, is what determines how much tax you’ll pay on this. If you’re at the basic tax rate you’ll pay 20%. This amount rises to 40% and then to 45% the higher up the tax bracket you go. The rates may be different if you live in Scotland. 
You can be given a tax relief if you qualify for one. An income tax relief means that you either pay less tax or you’re given a refund on paid tax to cater for specific expenses that you’ve incurred. Tax relief can be automatic while in some cases you have to apply to qualify. It’s easier to calculate costs incurred if the account in which you receive your rental income is separate from your regular accounts. Separating your revenue streams will make it easier for you to analyse your gains and expenses. Only the profit from rental property is charged an income tax. This means you have to first subtract allowable expenses from the rent to know the profits.

Allowable expenses

Expenses the can be subtracted are known as revenue expenses and these are expenses incurred from the day-to-day running of the property such as utility bills, maintenance etc. Expenses incurred on renovating the property i.e. to add value to the property can’t be subtracted. These can be factored in when calculating capital gains tax when you sell the property.

Changes on Tax Relief

Tax relief for landlords has been capped in the recent past. The amount of tax that landlords can now claim as relief is no more than 20%. This applies regardless of your income tax bracket and this means that people in higher tax brackets will have no tax relief on mortgage interest payments.

National Insurance

You may have to pay a class 2 national insurance tax in case you’re considered to be running a property business. This will apply if being a landlord is your primary job, if you acquire property with the intention of letting them out or if you let more than one property.

Stamp duty Surcharge

There is now an additional 3% stamp duty land tax if you’re buying property that will be your second home or as part of a buy-to-let business.

Capital gains tax

If a property isn’t your main residence, you’ll be required to pay capital gains tax when you sell the property. This tax is charged on the difference between the price at which you bought it and the price at which you’re selling it, assuming the value of the property rose.

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