It’s been a complicated few years for landlords, with a raft of tax changes making it harder than before to calculate your buy-to-let tax bill.
But with the 2018-19 tax return deadline just around the corner, Which? is here to help.
Here, we explain 12 things you’ll need to know about buy-to-let taxes, from the changes to mortgage interest tax relief to the expenses you’re allowed to deduct when filing your return.
1) Find out if you need to fill in a tax return
Whether you’ll need to file a self-assessment tax return depends on how much rental income you received in the 2018-19 tax year.
The first £1,000 of rental income is tax-free. So if you took in less than this amount across your residential properties, you won’t need to inform HMRC or file a tax return.
If your rental income was between £1,000 and £2,500, you’ll need to contact HMRC, which may collect the amount owed through your tax code rather than self-assessment.
If you brought in more than £2,500 in rental income, you’ll need to fill in a tax return.
- Find out more: self-assessment tax returns
2) Work out how much you might need to pay
Rental profits are taxed at the same rates as income from a job or business. The income tax bands for the 2018-19 tax year were as follows:
- Up to £11,850: 0%
- £11,850 to £46,350: 20%
- £46,351 to £150,000: 40%
- £150,001 or above: 45%
Rental income must be added to any other income you’ve earned when filing your return, which could tip some amateur landlords into a higher tax bracket.
For example, if you earn £40,000 a year in your day job, you’ll pay tax on everything above £11,850 at the basic rate of 20%.
If you then add £10,000 in rental income (making a total income of £50,000), this will push you into the next tax bracket, meaning you’ll pay 20% on your income up to £46,350, and then 40% on the remaining £3,650.
- Find out more: income tax rates and calculator
3) Find out if you need to pay National Insurance
Landlords who made a profit of more than £5,965 from letting property in 2018-19 may need to pay Class 2 National Insurance if HMRC considers them to be ‘running a business’.
This is likely to apply if being a landlord is your main job, you let out more than one property or you’re actively buying investment properties.
4) Don’t forget about capital gains tax
If you sold an investment property in the 2018-19 tax year, you may need to pay capital gains tax (CGT) on profits from the sale.
CGT on property is charged at 18% for basic-rate taxpayers and 28% for higher or additional-rate taxpayers.
For 2018-19, individuals had a tax-free allowance of £11,700 and for couples the allowance was £23,400. You’ll only need to pay CGT on any profits above these thresholds.
Currently, CGT declarations must be made on your tax return, but from April this year, landlords will instead need to declare and pay CGT using a separate form within 30 days of selling the property.
- Find out more: CGT allowances and rates
5) Understand mortgage interest tax relief cuts
Until recently, landlords were able to deduct the interest on their mortgage from their income, but the government is phasing this out.
For the 2018-19 tax year, landlords can deduct 50% of their mortgage interest, with the other 50% qualifying for a 20% tax credit.
Mortgage interest tax relief will be replaced entirely with a flat 20% tax credit from the 2020-21 tax year.
These changes can be complicated, but they’re a vital part of being a landlord in 2020. For more information and example calculations, check out our full guide on mortgage interest tax relief.
6) Assess your whole portfolio as one business
Whether you own two or 20 properties, they will be considered as one business for tax purposes, so all of your profits and losses must be added together to reach one final figure.
This means that if you’ve made losses on some of your properties, you can offset these against the profits you’ve made on others.
One note of caution – this rule only applies to properties in the UK.
7) Carry forward previous years’ losses
In a bad year, you might spend more than you receive in rent, experience a long void period or lose money when selling one of your properties.
The good news is that you can soften the blow by carrying that loss forward to a new tax year when your profits are higher.
Keep in mind that you need to apply the losses to profits exclusively earned from your rental business – so if you own more than one rental property, you can apply losses on one property to profits on another, but you can’t use losses to offset income from other sources such as your salary.
8) Understand what you’re allowed to deduct
When calculating your tax bill, you can first deduct a range of expenses that you’ve incurred as part of letting the property.
The most straightforward examples of this are letting agent fees, legal fees and accountancy fees.
You’re also allowed to deduct the costs of replacing domestic items, such as beds, carpets and white goods.
Whether you can deduct utility costs (such as water, gas and electricity) depends on whether it’s you or the tenant who is responsible for the bills in the tenancy agreement.
Find out more: expenses and allowances for landlords
9) Don’t forget licensing fees
An increasing number of landlords across the UK now need to apply for licences to let property.
For some, this is due to the rule changes for people letting Homes in Multiple Occupation (HMOs), and for others it’s due to their councils introducing their own local schemes.
The costs of applying for a license can be more than £1,000 in some areas, but you’re able to deduct this as a business expense on your tax return.
10) Report your income on a cash basis
Rules brought in for the 2017-18 tax year mean landlords can calculate their profits on a cash rather than accruals basis.
That might sound complicated, but in practice it means your tax bill will be based on how much you actually receive in rent during the year.
Previously, your profits were calculated based on your theoretical incomings earned in the tax year, regardless of whether that money was actually received. This meant if a tenant failed to pay rent, that amount could still be counted as income (although you could eventually write off bad debts as losses).
The cash basis is likely to be simpler for most landlords and can be used by any individuals or partnerships with an income of less than £150,000 in the year.
11) Don’t miss the deadline
Your tax return is due at midnight on the 31 January – that’s just four days away.
If you submit even a few minutes late, you could be hit with an automatic £100 fine, which increases for every day you’re late, so it’s important to make sure you submit on time.
12) File your 2018-19 tax return with Which?
For an easy-to-use, jargon-free way to file your tax return, try the Which? tax calculator.
You can tot up your tax bill, get tips on how to make savings and submit your return direct to HMRC.