How to turn landlord without your taxes being rent asunder
Landlords and those looking at buy-to-let need to be well-informed about the tax implications. So, here are key tax issues for landlords.
Even if your running costs are more than your rental income, you still need to notify HMRC about your UK rental source. If you receive more than £2,500 a year rental income then HMRC are likely to ask you to complete an annual self assessment tax return, but less than that and they may deal with it through your tax code instead. A tax return for the year ended 5 April 2015 will need to be submitted to HMRC no later than 31 January 2016. If the 2014/15 tax year is your first year of rentals, don’t leave it to the last minute to register with HMRC as it will take them a few weeks to process your registration.
There are rules about how you can get tax relief for any rental losses in a tax year. Losses can only be set against other rental property profits of the same year, or carried forward against future rental profits; but unfortunately you can’t set your losses off against your other income such as your salary. Bear in mind too that you may have more than one type of rental property, and losses from each type are ring-fenced and can’t be shared around the other property types. There are four classes of property lettings for this purpose: UK property lettings; overseas lettings; UK/EEA Furnished Holiday Lets; and other overseas Furnished Holiday Lets.
Property letting is a “business”, but not a “trade” for tax purposes. This means that you will pay higher capital gains taxes on sale of the property – 18% and/or 28%, depending on the amount of gain and your income of the year. The 10% rate of Capital Gains Tax available with Entrepreneurs’ Relief is only if the property is a Furnished Holiday Let. Letting properties will usually be subject to 40% Inheritance Tax, as they will not get the benefit of Business Property Relief. Even most Furnished Holiday Lets don’t qualify for Business Property Relief unless the landlord provides a very high level of additional services to the holidaymaker.
Particularly for landlords of multiple properties, there is a fundamental question about whether you are better off owning the properties personally, or in a company. This will depend on your own circumstances and plans. For example if you are liable to higher rate tax and wish to reinvest profits in the business rather than withdrawing them then a company might be worth considering, as it affords you flexibility for income tax planning. The Capital Gains Tax treatment of properties sold from a company is different. A company pays tax at the rate of 20% and gets a general inflation allowance which may partly compensate for rising property prices; but it doesn’t get the annual capital gains tax exemption that individual ownership of a property gives.
Where your aim is to sell a property at a large gain, pause at the start and consider whether the sale profit might be subject to income tax rather than Capital Gains Tax. The gain may be taxed at income tax rates (and without the benefit of the annual CGT exemption) if your intention from the beginning was to make a short term purchase and sale, and there was either no letting, or the letting was short term and incidental to the main purpose of sale of the property. There is no set time frame to distinguish the two different treatments, and for example if your letting was just a short term fix for being unable to sell a property that you had purchased and renovated for sale, then HMRC could regard the sale profit as being subject to income tax and self employed national insurance. Some landlords have a mixture of letting and development properties, and the tax treatment for the two is different even for the same owner. The time to consider tax planning around this – for example perhaps using a company – is the sooner the better, and not to wait until the end.