Property letting and buy-to-let
Buy-to-let has grown significantly over the past 20 years and it is one of the areas in which HMRC has recently operated several campaigns focussing on recovering additional tax from this area.
There are two primary taxes which are relevant to anyone involved in buy-to-let. The first is income tax and the second is capital gains tax.
Income you receive from the letting of a property is assessed to income tax at your marginal rate. A property is treated as having a profit and loss account where the notional profit is calculated by taking the rent received and deducting allowable expenses.
Allowable expenses would include the interest element of any mortgage on the property (although not any capital repayment), agency fees, accountancy fees and other direct costs associated with sub-letting the property including maintenance, repairs and redecorations.
There is an allowance for ‘wear and tear’ which is calculated at 10% of the net rents receivable. This has two advantages: – it is simple to calculate and relief is available immediately, rather than on a piece by piece basis and only when expense was incurred, e.g. if a washing machine needed to be replaced, you would only receive the allowance against revenue at that point.
There is no national insurance due on property lettings.
Capital gains tax
Unlike your own home, Capital Gains Tax (CGT) is applied to the gain or profit you make when you sell, give away or otherwise dispose of your buy-to-let property. Any gains are charged at 18% where they fall within an individual’s unused basic rate income tax band. Gains in excess of this are charged at 28%.
There are a number of reliefs available to reduce the tax suffered when you sell a buy-to-let property such as Letting Relief, if you have occupied the property personally.
If you’d like assistance in dealing with the tax implications of buy-to-let, or if you’ve had an unpleasant letter from HMRC, then please get in contact.