Landlords’ Tax

A quick overview of the key tax issues that landlords and property investors need to be aware of from the experts at Gravita Essex Accountants

As a landlord or property investor you must consider tax liabilities at the various phases of owning and renting a property, from purchasing, letting and upon sale.

Allowable expenses or tax

HMRC considers any costs that are essential to performing your duties as a landlord or maintaining the property to be “allowable expenses”. By offsetting these expenses against your rental income, it will reduce your potential tax liability.

Allowable expenses would include, among other things:

• Letting/Management fees
• Mortgage interest (see below for recent changes)
• Buildings insurance
• Professional/legal fees
• Maintenance
• Travel costs to collect rent

However, please always be aware of what is deemed to be the distinction between a capital expense (generally building improvements) and a revenue expense.

Revenue expenses relate to the day-to-day running and maintenance of the property and can be offset in the year they fall against your rental income.

Capital expenditure is not a tax-deductible expense against rental income; however, you may be able to offset these costs against any capital gains on the disposal of the property.

Mortgage Interest Relief

Your income from residential investment property may be substantially affected by the limitation in tax relief available for finance charges.

From 6 April 2020 landlords have not been able to deduct any of their finance costs from their property income. This could potentially push you into a higher tax band and trigger losses of other benefits and allowances. It will also increase your tax bill as basic rate tax relief on finance charges will be given as a credit against your tax liability. If your residential property portfolio is highly geared, you may have a tax liability even if you have made rental losses after deducting finance charges

Capital Gains Tax

When it comes to selling your residential rental property, you will probably be liable for capital gains tax on any gain made. Basic rate taxpayers pay capital gains tax at 18%, which increases to 24% for those paying tax at the higher rate. It is advisable to obtain specialist advice to potentially assist with minimising any potential liability.

There are a number of ways to reduce the capital gains tax (CGT) liability, one of which is to utilise the annual tax-free allowance that each individual is entitled to claim. The allowance is £3000 in the 2024/25 tax year. Therefore, no CGT will be chargeable on the first £3000 of the gain, assuming this annual exemption has not already been used against any other gains. For UK residential property disposals made, you have 60 days after the property’s sale completion date to report and pay any Capital Gains Tax due. You may have to pay interest and a penalty if you do not report gains on UK residential property disposals within 60 days of completing the property sale. If you’re not resident in the UK, you must report sales of UK property within 60 days, even if you have no tax to pay.

Like income tax, you can offset some expenses against the CGT bill:

• Solicitors and estate agent fees on the sale of the property;
• Initial legal costs and stamp duty on the purchase of the property;
• Capital expenditure such as major improvements as mentioned above

You do not pay CGT on your main residence; this is known as private residence relief. Also, if you have, at some point, lived in the property which you have then rented out and sold there is a further potential deduction that can be made against the gain to reduce the tax bill.

There are a number of other possible deductions from CGT and this is certainly an area we recommend you obtain professional advice, please see the contact details below in order to do this.

Should I run my buy-to-let business through a limited company?

There are clear advantages as companies are not affected by the reduction of tax relief for finance costs. If you can afford to retain profits in the company the only tax payable is corporation tax.

Potential downsides include increased costs to administer the company and exposure to personal tax and stamp duty. You would need to thoroughly examine the tax risks and strategies open to you.

Therefore, before proceeding, we strongly recommend you take personal advice from an expert such as Gravita Essex Accountants who have expertise in this area.

Additional Stamp Duty of 3%

An additional Stamp Duty charge on additional residential properties is made. If you buy a second residential property on top of your main residence, then the charge will be payable. The only exception is if the property is replacing your main home.

Replacement of Domestic Items Relief

Landlords of residential property (either individuals or a company) are entitled to claim Replacement of Domestic Items relief based on replacing (not the initial purchase) of certain domestic items for the tenants use.

All Landlords of residential property can claim a deduction for expenditure (against their rental income) on:

• The cost of the replacement item.
• Less the cost of any element of improvement (beyond the nearest modern equivalent).
• Less any proceeds of sale of the old item.
• Plus any costs of disposing of the old item.

A domestic item is an item for domestic use such as:

• Moveable furniture (sofas, tables, bed frames etc)
• Furnishings (curtains, rugs, carpets etc)
• Household appliances (fridges, freezers, washing machines etc)
• Kitchenware (utensils, crockery, cutlery etc)

Fixtures such as baths, toilets, boilers, fitted furniture that has become part of the dwelling-house (e.g. built in wardrobe and cupboards and kitchen units), that are not normally removed by the owner when the property is sold are not included. This is because the replacement cost is already a deductible expense as a property repair.

There are a number of ways to plan ahead when it comes to potential future tax liabilities, both for the letting income received and any gain on a sale.

For further advice and to arrange a meeting to discuss potential structures and tax planning, please contact Ben Chernoff on 020 8477 0000 who will be pleased to assist.