No one likes paying tax, but it's a thing we all have to do. Unless you don't mind going to prison for tax evasion, but that's not a good look for anyone. Just ask Wesley Snipes. You need to pay tax on your earnings, including the money you receive from rental income on your buy-to-let property.
For many involved with buy-to-let property, issues around tax can be somewhat confusing. That's why we're here to clear a few things up and provide an overview of your tax responsibilities as a landlord.
Of course, we're not accountants, and this article is simply our advice. If you would like a more thorough explanation, it's worth getting in touch with your local accountant. In the meantime, though, read on and learn the ins and outs of tax for landlords.
Do landlords need to pay tax on their rental income?
Like everyone else, landlords must pay tax on earnings over £12,500, whether it's from professional income or investments like buy-to-let properties. As soon as you hit that £12,500 threshold, the tax max (or woman) will come calling.
If, however, your rental income is the only money you earn and it's below £12.5k, you won't need to file any tax returns or pay tax. Even if it's over, you'll only pay tax on what you earn that is over £12.5k.
What is the taxable rate on your buy-to-let?
Any earnings you make between £12,500 and £50,000 require you to pay a rate of 20% tax. This rises to 40% for income between £50,001 and £150,000 and 45% for earnings over £150,000.
The Inland Revenue also doesn't treat your earnings separately. If you make £50k per year from your job and £35k per year from your rental property, you will be charged tax on £80k (minus the first £12.5), which would put you into the higher tax bracket of 40%.
How can you mitigate tax?
So the bad news is that you have to pay tax, and it might sound like quite a lot. There is good news, though. As a landlord, you will have expenditure which you can offset against your taxable income. How does this work, you ask? Allow us to explain.
Let's say you buy a property with the intention of renting it out. You will need to advertise the property, either by paying a letting agent, doing it yourself or using a renter-friendly platform like Movebubble (or perhaps you'll use all three).
If you spend, say, £1,500 altogether on marketing your buy-to-let, that expense can be wiped off your tax bill. That £80 just fell to £78.5k. Every little helps.
Marketing costs aren't the only thing you can offset against tax. Here are a few more:
Any landlord on an interest-only mortgage payment can claim a basic rate of 20% from their interest on their overall earnings. For example, if you pay £5,000 a year on interest, you will be able to wipe £1,000 off your tax bill.
The property will need managing once you've let it. Whether you pay for a property management company to take care of your rental or do it yourself, you will be able to offset any money you pay towards repairs like fixing a broken boiler, dishwasher, washing machine et cetera. If you're hiring a company, you can also deduct their annual cost from your tax bill.
Landlords typically need to pay for services while they own their buy-to-let, including ground rent and service charges if the property is in an apartment block. Other services may include legal fees, letting agent fees and, as previously mentioned, property management fees. All of these costs can be offset against your mortgage.
Many rental properties come furnished, and someone has to pay for that shiny furniture. That someone is the landlord, but it's not an unnecessary expense. Other than providing furniture for your renters (kind of important if they aren't bringing their own), you can use these costs to lower your tax bill. You will also be able to deduct the cost of any replacement furniture, as long as it's the same price as the item it's replacing.
No one likes void periods, but from time to time, landlords will likely experience one. When a property is empty, it becomes the landlord's responsibility to pay for bills like the council tax and utility bills. Fortunately, you can claim back all expenses incurred on bills from from an empty property.
How does it all work?
So there's a fair few things you can use to mitigate your tax bill. Good news. But how does it all work? The tax year runs 12 months from April to April, with your tax due the following January. It sounds complicated, right?
It is a bit, but worry not. Let's take this year, for example: everything you earn between April 6th 2020 and April 5th 2021 counts as a tax year. You will then need to pay the tax bill for this year in January 2022, but you can do your tax return any time after April 5th, just in case you want a head start on what you owe.
Any monies paid for in regards to your rental property between April 6th 2020 and April 5th 2021 goes towards that tax bill. Essentially, you want to think of the year as starting in April and finishing 12 months later, at least from a tax point of view.
Life, death and taxes
Paying tax is unavoidable, but there are things you can do to bring the overall cost down. And with our guide, you will have a good grounding in all things tax.
Not to mention you can use calculators so that you'll have a rough idea of what you may owe. Nail the tax side of your buy-to-let, and you can enjoy the good things, like passive rental income, providing a home for professional renters and an asset that hopefully increases in long-term value.