If you are buying your first property to rent out or if you are a seasoned buy-to-letter with a portfolio of houses, you’ll need to be well-versed in terms of what you’ll be taxed on and need to declare to HMRC. And that is where untied comes in – we’re here to help you navigate this tricky landscape and submit your taxes on time.

 

What is a buy-to-let property investment?

Buy-to-let is pretty much what it sounds like – you buy a property to rent it out to tenants. You should consider the property a medium to long-term investment.

 Buy-to-let investment is very different from owning your own home to live in yourself. When you become a landlord, you’re effectively running a small business – one with important legal responsibilities.

Once you buy a property, you can potentially earn a profit in two ways:

  • Rental yield – what your tenant(s) pay in rent, minus any maintenance and running costs, like repairs and agent fees.

  • Capital growth – the profit you earn if you sell your property for more than you paid for it.

 

So what taxes are involved?

There are three key taxes that you need to be aware of when you’re buying a property in your own name –tax on rental income, the Rent a Room Scheme, capital gains tax and stamp duty.

 

Tax on rental income

The first £1,000 of your income from property rental is tax-free. This is your ‘property allowance’.

If you earn more profit than this from your rental property, you must declare it on a self-assessment tax return.

What kind of expenses can I claim if I’ve bought a property to rent out?

Your profit is the amount left once you’ve added together your rental income and taken away the expenses or allowances that you can claim. The kind of expenses you can deduct if you pay for them yourself is quite extensive and includes general maintenance and repairs (but not the cost of large improvements), utility bills and council tax, any ground rent and service charges, building and contents insurances, the cost of services such as cleaning or gardening and the direct cost of letting the property such as advertising, agents’ fees and legal costs.

If you’re an AirBnB host, there’s more in this article on tax and expenses.

untied Pro makes it very quick and easy to run through payments you’ve made from your bank accounts, and then tag and list those items that you want to claim as expenses.

 Some mortgage interest also qualifies as a deductible expense – it’s a messy calculation, which of course untied also takes care of, so you don’t need to worry about it.

 

The Rent a Room Scheme

This is a government incentive that allows owner occupiers and tenants to receive tax-free rental income if they provide furnished accommodation in their only or main home. It allows people to earn up to a threshold of £7,500 per year tax-free (£3,750 if they’re letting jointly). The limit is the same even if you let accommodation for less than 12 months.

If the amount you earn from renting out the room is less than the thresholds of the Rent a Room scheme, then your tax exemption is automatic and you don’t need to do anything. If you earn more than the threshold, you must complete a tax return (even if you don’t normally).

The income limit covers everything tenants are charged as part of the rental service - so if you charge them for cleaning, meals or laundry you'll need to count these fees too. It means that if you use the rent-a-room scheme, you won't be able to deduct any expenses from your rental income.

 

Capital Gains Tax

If you make a profit when you sell your buy-to-let property, you’ll be liable to pay Capital Gains Tax.

In the UK, you pay higher rates of CGT on property than other assets. Basic-rate taxpayers pay 18% on gains they make when selling property, while higher and additional-rate taxpayers pay 28% (compare this with other assets where the basic-rate of CGT is 10%, and the higher-rate is 20%). Bear in mind that any capital gains will be included when working out your tax status for the year and may push you into a higher bracket. All taxpayers have an annual CGT allowance, meaning they can earn a certain amount tax-free. In 2022-23, you can make tax-free capital gains of up to £12,300 (this is the same as 2021-22). Couples who jointly own assets can combine this allowance, potentially allowing a gain of £24,600.

You're not allowed to carry this forward, so if you don't use it, you'll lose it.

 

Stamp duty

Gov.uk is the best place to go to get expert information on Stamp Duty. However, we have provided a simple summary here:

Stamp Duty Land Tax (SDLT) is payable if you buy property or land over a certain price in England and Northern Ireland (see here for more information if you are in Scotland or Wales). The tax is paid when the sale is completed and is based on the sum paid.

For residential properties (ie your only home), the stamp duty brackets for 2022 are as follows: 

Stamp Duty Brackets

Rate

Up to £125,000

0%

The next £125,000 (the portion from £125,001 to £250,000)

2%

The next £675,000 (the portion from £250,001 to £925,000)

5%

The next £575,000 (the portion from £925,001 to £1.5 million)

10%

The remaining amount (the portion above £1.5 million)

12%

However, any property bought in addition to your main residence, be it a second home, a holiday home or a buy-to-let, there is an additional stamp duty charge. This starts at 3% and then rises in bands, climbing to 15% for the most expensive properties.

 Buy-to-let and second home stamp duty tax bands for 2022:

Stamp duty brackets

Standard rate

Buy-to-let/second home rate

Up to £125,000

0%

3%

£125,001 - £250,000

2%

5%

£250,001 - £925,000

5%

8%

£925,001 - £1.5m

10%

13%

over £1.5m

12%

15%

 

There is Stamp Duty Land Tax relief for a number of land or property transactions. Find out more here

 

When do I need to file my tax return?

The deadline for paper returns is 31 October every year for the tax year that ended in April. For online returns, it’s 31 January of the following year.

Download the untied personal tax app – it can help you follow the rules and reduce the tax you pay on your property while being an expert in yourself, not an expert in taxes. Try it out for free for the first 30 days. https://www.untied.io/#pricing

 

Making Tax Digital

From April 2024, if you’re a property owner, there’s a new way of reporting your tax. It’s called Making Tax Digital for Income Tax. untied is ready as the first end-to-end app recognised by HMRC. We also have a platform if you work with an accountant.

It’s still a year and a half away but there’s no harm in getting a head-start on what you need to know, take a look here. untied users are part of HMRC’s testing – drop us a line if you want to join them.

 

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