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%, 2007/8)

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.

For the tax year 2008/2009 it is proposed that a single flat rate of 18% will apply to the sale of property. Taper relief and indexation allowance will be withdrawn.

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 £9,200, 2007/8). If a property is held in joint names then you will be able to deduct both allowances     (2 x's £9,200 = £18,400) 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%.

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	2006-07 (£)	2007-08 (£)
Starting rate 10%	0 - 2,150	0 - 2,230
Basic rate 22%	2,151 - 33,300	2,231 - 34,600
Higher rate 40%	Over 33,300	over 34,600

Inland revenue helpline 0845 9000 444

Inland revenue website www.inlandrevenue.gov.uk

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