We get asked a lot of questions around BTL tax, although I once practised as an Accountant before moving over to Financial Services I am no tax expert!
To help our clients and to hopefully answer some of the more common questions we’ve compiled this guide.
However, this has been produced for information purposes only as we unable to offer tax advice, the information was correct as at December 2019.
So, what does this mean for you? The new changes ultimately mean you could pay more tax which will affect your profit.
This guide is correct at the time of publication and we recommend landlords consult an accountant about their personal situation.
Income Tax - Mortgage/loan interest
Some people will tell you that you can claim the repayment element of your mortgage, this is untrue.
You have only been allowed to reclaim the interest element but, since 6 April 2017, there are restrictions on how you can claim the interest on any loans (and any other finance costs such as arrangement fees).
The changes mean:
- Instead of claiming finance costs as a letting expense you will, instead, claim a deduction (tax credit) which will reduce the tax due on rental properties via your tax return. For the 2017 – 2018 tax year you could claim up to 75% of the finance costs, but from 2019 – 2020 it is 25% deduction and from there on its zero. The government has replaced this with a 20% tax credit.
- There is will no longer be additional relief for higher rate taxpayers. The deduction will be limited to a maximum of 20% of finance costs.
For example:
- If you are a 45% tax payer and claimed £10,000 interest expense in 2016/17, you would have saved £4,500 tax. By 2020/21, you will only have a deduction of £2,000 tax so you will be £2,500 worse off.
- If you are a 40% tax payer and claimed £10,000 interest expense in 2016/17, you would have saved £4,000 tax. By 2020/21, you will only have a deduction of £2,000 tax so you will be £2,000 worse off.
- If you only pay tax at 20% then you will pay the same amount of tax but you will claim a tax deduction in the appropriate part of the tax return instead of with your other letting expenses.
The changes are being phased in gradually over three years and the deductions for finance charges are gradually being restricted. You can view further information from HMRC here
The new “tax credit” isn't as beneficial for higher-rate and additional taxpayers. To help mitigate the new tax changes many landlords are setting up a special Limited Company called a Special Purpose Vehicle or SPV. The pro’s and con’s of an SPV are detail in a separate guide.
In real terms, this means:
- Your taxable profits will be higher so you could pay more tax
- You may pay tax even if you have no net cash after paying out loan interest and repayments
- You should really review your BTL property/Portfolio with your accountant to see what impact this could have on your cash flow
Other expenses
- Buildings insurance (contents only if it’s furnished property)
- Heat and Light
- Cleaning
- Gardening
- Security
- Rent and ground rent
- Service charges
- Council tax while vacant
- Repairs and maintenance (But not improvements)
- Replacements
- Redecorating
- Small tools
- Legal e.g. preparation of rental contracts (legal costs on purchase and sale are claimed against capital gains tax, profit and loss on obtaining finance is not allowed as a finance cost)
- Accountancy fees
- Debt collection fees
- Other insurances
- Advertising
- Letting agents’ fees
- Travel
- Advertising for new tenants
Accruals VS Cash basis
Rental accounts are easy to prepare for a single property and don’t have to be complicated. We would always recommend using an accountant but you are under no obligation to do so. We have clients who use Excel to prepare their accounts, some use online accountancy software and others leave it for their accountant.
Prior to the 6th April 2017, income and cost had to be included in rental property accounts on an “accrued” basis. In basic terms, in the tax period they were incurred. Post 6 April 2017, the “cash” basis is used for those with rental income below £150,000pa.
Some landlords find the cash method easier as you include receipts and payments when the money moves and ignore anything that is still owed. If this is your only business income then it is easier to manage as you can just keep a separate bank account for your property transactions.
You can still opt to use the accruals basis if you prefer.
Repairs or improvements?
Repairs and improvements are both allowable costs. Claiming this relief needs care as tax relief is claimed in one of two ways depending on whether building work is a repair or an improvement.
Repairs and maintenance usually include:
- Painting and decorating
- Re-pointing existing brickwork
- Damp or rot treatment
- Repairs to existing equipment, windows, doors, etc.
- Replacing a roof
Improvements are tax differently, typically items are work which improves the property such as an extension. These costs can be claimed to reduce your capital gains tax when you come to sell the property.
It is difficult to decide what is an improvement or a repair, we tend to see an improvement as something that adds value to your BTL. This is where we’d recommend you speak to HMRC or your accountant.
Furniture and fittings
Another recent change is the removal of the 10% wear and tear allowance to cover furnishings (beds, sofas etc) or appliances. Since 6 April 2016, it is only possible to claim the actual cost of repairing or replacing these items. This means that you now need to keep your receipts etc.
Capital gains tax
Let's fast forward, and it is time to sell your BTL. Everything has gone well and your property has increased in value. The increase is taxable as a Capital Gain; this is in stark contracts to selling your main home.
The good news is that you can claim the costs of purchasing, selling and improving the property plus a couple more (the property was once your main residence), these are available via the HMRC website https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual.
Image of table here
There is an annual capital gains allowance available for each individual owner to offset net gains/losses in the year of disposal. Everything above this allowance is currently taxed at 18% or 28% depending on your normal tax rate.
If you are thinking of selling a property that has significantly increased in value we’d strongly recommend you tax specialist tax advice before the sale.
Furnished holiday lets (FHL)
This is a strange one, as the UK has left the EEA we are not sure if special rules apply when letting out a holiday property in the European Economic Area (EEA) will continue.
To qualify as a FHL, the property must be:
- Available to let commercially for at least 210 days in the year
- Actually let at a commercial rate for at least 105 days per year
- Any letting periods over 31 days long can’t be included in the 105 days and the total of all such longer lets must be less than 155 days per year.
If you own a FHL then these properties must be accounted for separately from your other properties, however, there are additional reliefs available.
Stamp duty
When you purchase a property you will more than likely pay stamp duty land tax (SDLT), unlike purchasing your main residence there is no nill band when buying a second home or a Buy to Let. The rate you pay will depend on the price you pay for the property.
From 1 April 2016, the rate of stamp duty was increased by 3% on second properties which may be a second home or a buy to let property from £0 - £125,000 and increasing depending on the value.
Purchase price - TABLE
The SDLT rules are not simple, and there are some tax reliefs available. If you are in any doubt you should speak to your accountant or conveyancer.
If you opt for a “Let to Buy” on your main residence you will need to pay SDLT at 3% but that can be reclaimed if you sell the property within 36 months.
Companies also pay SDLT on all property purchases.
Differences for companies
Following on from the opening paragraph, we have briefly summarised the differences when using an SPV. If you decide to use a limited company (SPV) to hold your property portfolio, you will pay tax on profits as a corporation tax of 19% on all profits.
You will potentially have to pay further tax when you want to take the profits out of the company as salary (PAYE/National Insurance) or dividends (dividend tax).
There is no annual allowance for a company’s capital gains on sale.
Using a limited company may give you more opportunities for tax planning but there will also be higher admin and accountancy costs. There are also different inheritance tax rules when transferring shares in a property company rather than transferring the properties themselves.
Differences for trusts
There may be Inheritance Tax (IHT) advantages if your property is held in a trust.
If you are thinking of using a limited company or a trust then it is worth taking professional advice.
Next steps
This guide has been designed to answer some of the most common questions and to give new and experienced landlords something to think about.
If you want to discuss your mortgage options for a BTL or portfolio let us know. We work with specialist tax accountants who have a wealth of experience in this sector. If you’d like tax advice we can arrange this for you and work with the tax specialist to make sure you receive the perfect solution.
If you choose to go it alone, good luck! But at least let us arrange the mortgage and insurances.
Published date: December 2019
The information in this guide is correct as at the date on the document.
MyInfinity Finance Limited does not accept any responsibility for how the guide is used.