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Buy To Let Properties
Given the strength of the housing market over the past few years many people are investing in buy to let properties both as a means of providing income but also as an investment for the future. Those that have bought the right properties in the right areas have seen a healthy return on their initial investment. This guide attempts to answer some of the main questions people ask about rental properties.
Buy to let properties and income tax
Whilst the rental income received may cover the mortgage repayments on a buy to let property there is often still a reportable net income arising for tax purposes. This is due to the difference in treatment of expenses for tax purposes as certain expenses are not allowed as deductions against rental incomefor tax purposes. Any income received from rental properties is taxed at either 22% or 40% depending on your income level.
If your total income including net rental income is below the higher rate threshold then your rental income will be taxable in full at 22%. If your total income is over the higher rate threshold then the element of your rental income that falls above this threshold will be taxable at 40% with the remainder being taxed at 22%. If you do not currently complete a Tax Return then if you start receiving rental income you will have to contact the Inland Revenue and advise that you are now due to complete a Tax Return each year.
Expenses allowable for tax purposes
Inevitably running a rental property will involve some element of expenditure on your part for the general maintenance of the property along with the administration of the letting. The majority of expenditure incurred will be allowable for tax purposes and can therefore be set against your total rental income to arrive at the taxable income. However, some expenses are specifically disallowed for tax purposes. We will now detail the expenses that are often associated with rental properties.
The following expenses are allowable deductions for tax purposes:-
- House Insurance
- Water Rates
- Council Tax
- Factoring charges
- Property repairs (see section on repairs)
- Repairs to appliances
- Letting Agent’s commission and fees
- Accountancy Fees
- Electricity and gas
- Mortgage interest & fees (but not capital repayments)
- General maintenance such as garden upkeep and cleaning.
- Telephone (calls in connection with managing property)
- Mileage (mileage travelled in connection with managing property)
Repairs
Expenditure occurred in respect of repairs to the rental property
are allowable costs for tax purposes. Repairs are defined as expenses
that prevent the property from deteriorating and include repairs
such as external and internal painting, stone cleaning, damp treatment,
roof repairs, furniture repairs and repairs to lifts or other machinery
or appliances.
Any expenditure incurred which relate to improvements, additions or alterations to the property are specifically disallowed. Any such costs are capital expenditure in nature and are added to the base cost of the property when calculating the capital gains tax position on your eventual disposal of the property.
Furnished Residential Properties
If you let a furnished residential property you have two options
in terms of the deduction that can be claimed for renewing any
appliances, fixtures and fittings:-
- You can either claim the net cost of replacing a particular item of furniture of fittings but not the cost of the original purchase.
- Alternatively you can claim a 10% wear and tear allowance and not claim the actual costs of renewing furniture & fittings. This allowance represents 10% of the total rents received for the year less any service charges that a tenant would normally pay such as council tax. (e.g. total rents £5,000, council tax paid by landlord £500. Total wear and tear allowance claimable = 10% x £5,000 -£500] = £450.)
Mortgage Payments (finance charges)
If your rental property is mortgaged you are allowed to claim any
expenses incurred in connection with the obtaining of any loans
or alternative finance arrangements along with any interest incurred
on any loans taken out to purchase the property. If you have owned
your rental property for a period before it was let out please
contact us as the allowable finance charges are slightly more complicated.
Legal and Professional Costs
Legal expenses in connection with the preparation of a lease for
a year or less are allowable. Costs associated with longer leases
are specifically disallowed. Other legal and professional costs
that are allowable are:
- management fees in connection with the ongoing costs of letting such as rent collection and organising repairs etc.
- Normal legal and professional costs relating to renewal of a lease of 50 years or less.
- Professional fees in connection with the eviction of unsatisfactory tenants.
- Accountancy fees in connection with the preparation of accounts.
Private use of your rental property
If your property is only let for part of a tax year and the rest
of the time it is used for non-letting purposes then you must deduct
the proportion of expenses that relate to the private use of the
property. If for example you let your property for 8 months during
a tax year and then live in it for four months then you can only
claim two-thirds of any expenses (8/12) as the remainder is not
incurred in the course of your rental business.
Renting a room in your home
If you rent a furnished room in your only or main home then you are
entitled to an exemption whereby the first £4,250 of any rental
income is not taxed. Please contact us if this applies to you as
the rules are slightly
different.
National Landlord Registration Scheme
The Antisocial Behaviour Act (Scotland) 2004 introduced a new compulsory
registration scheme for private
landlords and their agents. Under the terms of this act all private
landlords must register with their local council
before letting any residential property. Failure to do so is a criminal
offence and local councils
can prosecute those who fail to register.
Under this scheme all landlord will be held responsible for the actions of their tenants and will be required to take action to prevent any antisocial behaviour by tenants in their rental properties. Failure to do so will result in the local council taking action against the landlord. Registration is not automatic and all landlords must pass a qualifying test to ensure that they are a ‘fit and proper person’ to manage a rental property.
If you require any further advice or assistance regarding this topic please contact us and we will be happy to provide further information or assistance.