The business of buying and letting a property can be complicated and any decisions made on the basis of the tax payable could well change at various points in the property business life-cycle.
There are a number of potential pitfalls to trip-up the unprepared landlord, so forward planning will always pay dividends. But remember, property investment must be thought of as long-term and tax laws may change with relatively short notice. This may have an impact on the profitability of the business and the level of any taxes payable, so a degree of flexibility is necessary in every plan.
Buy-to-let: Whether to buy as an individual or through a company
If you buy through a limited company, the income received will currently be taxed at 19%, compared to income tax rates of 20, 40 or 45% for an individual. Also, a company can claim a full deduction for all interest and finance charges it incurs to fund the property business. When you come to sell, if your property business is contained within a company you can sell the whole company rather than the individual properties, which will reduce Stamp Duty for the buyer from as much as 15%, down to 0.5%.
Buying as an individual will mean that the deduction of interest and finance charges paid will be restricted and replaced by a 20% tax credit which is set against the landlord’s total income tax liability. So, if you need substantial borrowings to finance any purchases, it will be more tax-efficient to hold residential properties within a company.
Your tax position as an individual
Income from the property as an individual is added on top of any other income to arrive at the tax rate (known as top-slicing), so it could be 20, 40 or 45%, dependent upon your other income. It is also worth checking whether any allowances will be lost by increasing your total income, for example:
If you have any outstanding student loans, you will pay 9% of the rental profits as student repayments, assuming other income already exceeds the repayment threshold for that type of loan. Also, if your taxable property income increases your total income above £50,270, you may have some or all your family’s child benefit clawed back, as the high-income child benefit charge.
Additionally, a recent change in the rules means that from April 2021, you can’t deduct mortgage expenses from rental income. Instead, landlords will get a flat-rate 20 per cent tax credit on interest payments, which is not as beneficial for higher-rate and additional-rate taxpayers.
Stamp Duty Holiday
Good news, the recent Budget extended the Stamp duty holiday on house purchases until 30th June, with no tax charged on sales of less than £500,000. After this date, the starting rate of stamp duty will be £250,000 until the end of September, before returning to the usual level of £125,000 on 1st October 2021.
Landlords and second-home buyers also benefit from this suspension but will still have to pay the 3% investor stamp duty surcharge. This rule also applies to limited companies.
Buy-to-let: How to let residential property
- Assured Shorthold Tenancy Agreement (ASTA) – The normal practice is to rent a property using an ASTA, with these agreements varying from a minimum of 6 months and a normal maximum of 3 years. The length is agreed upon by the tenant and the landlord, with the rent payable not able to be changed during the life of the agreement, unless a special clause is included for which you will need legal advice.
- Furnished Holiday Let (FHL) – Assuming the property is suitable, you could consider letting it as an FHL. To qualify as a FHL your property must be fulfil 4 criteria in any tax year, which are:
- The property must be fully furnished, including bedding and basic appliances, and
- You must let the property to the public for at least 105 days in the year, and
- The total of lettings that exceed 31 continuous days must be less than 155 days in total, and
- The property must be available for letting as furnished holiday accommodation letting for at least 210 days.
Providing your property meets the above criteria, capital allowances can be claimed on the cost of all furniture and fittings. Additionally, business rates, rather than council tax, are payable for properties used as FHL’s, with up to 100% relief available for small properties, which could well eliminate the rates bill.
Buy-to-let: Tax and reliefs when selling a residential property
- Individuals – When you sell the property, you’ll pay 28% Capital Gains Tax (CGT) on any gains if you’re a higher or additional rate taxpayer, but only 18% if you are a basic rate taxpayer. These rates apply after deduction of a CGT exemption allowance of £12,300. The allowance is for the individual, not the property, and covers one tax year, but if there are multiple owners (such as a husband and wife) each owner can claim a full allowance.
Additionally, assuming you’re selling all properties in your portfolio, you should consider selling the whole business and claiming Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief). This will mean that you will only pay tax at 10% on any gains. To qualify for relief, both of the following must apply for at least 2 years up to the date you sell your business: you’re a sole trader/partner and you’ve owned the business for at least 2 years.
- Limited Companies – Business Asset Disposal Relief is also available, but only applies if you’re selling the whole, or a substantial part, of your business. To qualify, in the 2 years prior to the date you sell your shares: you must have been an employee or office holder of the company and have held at least 5% of both the shares and the voting rights.
Additionally, you must also have been entitled to at least 5% of either: profits that are available for distribution or 5% of the value of assets realised on the disposal of the company, either by its sale or if it’s wound up.
Tax Accountant Comment
As you will now have realised, getting into the property rental market can be rather complicated, especially regarding tax, whether it be on buying, running the business or on eventual disposal. It is therefore very important to seek specialist tax advice if you’re planning to become a buy-to-let landlord.
As ever, if you would like more detailed information on some aspect of UK Tax, send me an e-mail and I’ll be pleased to advise further.