Buy to let taxation
The regulations relating to taxation are complex and
liable to change. We recommend that you make your own
enquiries with the Inland revenue or with a professional
accountant to verify the position with regards your own
tax situation
We are each responsible for declaring and paying the
taxes that are due.
When you buy your first let property, you should
inform the Inland Revenue by no later than 6th
October, in the year following the tax year when you
start.
You should submit a tax return for the tax year in
which the rental payments are due. You will need to
complete schedule A; this schedule covers rental income
from UK land and buildings.
Single or Joint Ownership
If you put a property into joint ownership then the tax
liability is shared. There are increased tax benefits if
one of the partners is a non taxpayer.
It is easier and cheaper to sort out ownership at the
outset. If you buy a property in one name and then decide
to transfer ownership into joint names then there will be
significant administration and expense to bear.
Income tax
You will have to pay income tax on the net profits
you make from the rental income at your highest rate of income tax. If you are
currently a higher rate income tax payer then the profits
you make from letting will be taxed at the higher rate
(currently 40%, 2005/6)
If the property is in joint ownership then the tax
liability is shared accordingly.
The regular rental income you receive is your gross
income. You can deduct from this figure, various
expenses to arrive at a figure for net profit. The
largest of these expenses is likely to be the interest
payments on your mortgage.
In determining whether an expense is allowable, the
Inland Revenue say it should be wholly and exclusively
used for the purposes of the rental business. For
example, repairs, redecoration, cleaning, gardening and
insurance are all allowable
expenses. You should keep careful records of
income and expenditure. You will need to submit accounts
to the inland revenue either directly or via an
accountant. This will be much easier if you keep proper
records. It would be sensible to open a separate
bank account for your investment property. Always fill in
your cheque book stubs with a description of the expense,
you may not remember the purpose of those blank stubs when
the day of reckoning comes. The Inland revenue can request
sight of receipts and invoices!
Capital Gains Tax
When you come to sell your investment property the
profit (or gain) you make may be subject to capital gains tax.
Capital gains tax is not payable immediately but is reported to the
Inland revenue by completing the 'Capital Gains Tax' section of your
tax return. Once the tax has been calculated you will be sent a
statement of account. Please
note that capital gains tax is not due on any profit you
make from the sale of your principal home. If a property
has been used both as home and as a let property then
profits are apportioned according to the time spent in
either use. However exemptions may apply. Please contact
the inland revenue to discuss your situation.
There are two other considerations which would have
the effect of reducing the tax payable.
Each individual has an annual capital gains tax
allowance (currently £8,800, 2005/6). If a property is
held in joint names then you will be able to deduct both
allowances (2 x's £8,800 =
£17,600) from the gain, which will leave you with the
net taxable gain. The initial purchase price can be increased in line
with the retail price index. This will have the effect
of stripping out any inflationary gain. A tapering tax
relief applies the longer a property is held. This relief
is applied from the 3rd year of ownership, with a 5%
discount deducted for each additional year from the
taxable gain up to a maximum of 40%.
| Period asset
held (complete years) |
Percentage of
gain chargeable (%) |
| 1 or 2 |
100 |
| 3 |
95 |
| 4 |
90 |
| 5 |
85 |
| 6 |
80 |
| 7 |
75 |
| 8 |
70 |
| 9 |
65 |
| 10 or more |
60 |
Please note that taper relief applies to full
years. Check the date of purchase and ensure that the date
of sale (completion) does not fall a few days short of a
full year or you could lose valuable tax relief. The net
capital gain is
added to your income at the end of the tax year and is
taxed at the appropriate rate. If the gain plus your income takes
your overall income into the higher rate tax bracket then the
portion over the higher rate charge band will be taxed at 40%.
Taxable Bands
|
Taxable Bands Allowances
|
2005-06 (£)
|
2006-07 (£)
|
|
Starting rate 10%
|
0 - 2,090
|
0 - 2,150
|
|
Basic rate 22%
|
2,091 - 32,400
|
2,151 - 33,300
|
|
Higher rate 40%
|
Over 32,400
|
over 33,300
|
If you’ve received a
Self Assessment tax
return, follow the
guidance to decide if
you need to fill in the
capital gains pages as
part of that return. The
return tells you how to
obtain these pages if
you need them.
If you don’t usually
complete a tax return,
but wish to report gains
or losses, contact your
local Tax Office and ask
them to send you a
return and the relevant
pages. If you have CGT
to pay you must tell
your tax office in
writing by 5 October
following the end of the
tax year.
Inland
revenue helpline 0845 9000 444 Inland
revenue website www.inlandrevenue.gov.uk
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