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Taxes for UK landlords: The complete guide for 2019/2020 www.hamiltonfraser.co.uk/landlord-insurance
02 Taxes for UK landlords: The complete guide for 2019/2020 03
Taxes for UK landlords:
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The complete guide for 2019/2020
Property taxes can be a complicated business, especially for new
landlords. In the flurry of activity around getting your property ready to
rent, choosing a tenant and planning what you’ll do with your anticipated
new income, it’s all too easy to forget about tax.
Getting on top of capital gains tax, stamp duty, When you buy property - stamp duty
corporation tax, expenses and all the other things
landlords have to think about can be a minefield. If you buy a property over a certain price in the UK,
That’s where this guide comes in. As much as is you are eligible to pay tax. The exact tax you pay
humanly possible, we’ll tell you what you need to and the specific value of the property that triggers
know and do about the taxes you’ll pay as a landlord, it, will be different depending on your location
how to ensure you’re paying your fair share, clarify key and circumstances; and you should always seek
terms, and give you the most up-to-date info about all professional advice for personal tax related queries.
things tax for 2019/20. In England and Northern Ireland, individuals pay These are only the basic rules. If you’re buying for the higher rate of 40 per cent tax applies to incomes over
We can’t guarantee edge-of-your-seat thrills and Stamp Duty Land Tax (SDLT) on residential properties first time, the thresholds for paying stamp duty are £50,000 - and if you make more than £150,000, you
spills, it’s tax after all, but we will touch on the most worth £125,000 or more, and on non-residential generally higher, so you may not have to pay. If you’re pay the additional rate of 45 per cent.
crucial things you need to know for the coming year properties or land worth £150,000 or more. You must buying-to-let, stamp duty rates are tiered and start
As a landlord, you’re entitled to a £1,000 tax-free
and beyond. In this guide we’ll address: send an SDLT return to HMRC and pay your SDLT at a lower value than those for other home buyers. In
property allowance: if you make less than £1,000
within 30 days of completing the purchase. Your England, the rates look like this:
1. What taxes do landlords pay? a year from letting property, you don’t need to tell
solicitor, agent or conveyancer, if you have one, can
Property price Buy to let stamp HMRC. If you are self-employed as a landlord - in
2. Tax effective property ownership do this on your behalf, or you can file a return and pay
duty rate other words, you don’t run a limited company and you
the tax yourself.
3. Property expenses - what you can and can’t claim file a self-assessment tax return - you’re also entitled
Property buyers in Scotland pay Land and Buildings £0 - £40,000 0 per cent to a £1,000 tax-free trading allowance.
4. Extra tax savings for married couples Transaction Tax (LBTT) on residential properties £40,001 - £125,000 3 per cent If you make between £1,000 and £2,500 a year from
5. New buy to let tax changes for 2019/2020 worth more than £145,000, and on non-residential
letting property, you must make HMRC aware of the
properties worth more than £150,000. Scotland also £125,001 - £250,000 5 per cent
Bear in mind, this guide is meant as a general fact. If you make between £2,500 and £9,999 after
has an Additional Dwelling Supplement, payable on
overview of the current tax landscape. For £250,001 - £925,000 8 per cent allowable expenses, or over £10,000 before allowable
properties worth more than £40,000. You pay this
furthermore in depth personal tax advice tailored expenses, you will need to make a self-assessment
if you already own a residential property and buy £925,001 - £1.5 million 13 per cent
to your specific requirements and circumstances, tax return and may have to pay income tax.
another. All LBTT is paid to Revenue Scotland through
make sure you seek professional advice from a tax an online portal. £1.5 million + 15 per cent If you’re filling out a paper form to make your self-
specialist. assessment tax return, you must do this by 31
Property buyers in Wales pay Land Transaction Tax
October each year. If you’re returning your self-
1. What taxes do landlords pay? (LTT) on residential properties worth more than While you’re letting property - income
assessment tax return online, you must do so by 31
£180,000, and on non-residential properties worth tax January each year.
Let’s begin by looking at what property taxes exist, and more than £150,000. As in Scotland, there are
when they have to be paid. If you make money from letting a property, you may
additional charges for residential properties worth
have to complete a self-assessment tax return,
There are three key moments to think about in the more than £40,000 if you already own a residential
depending on your total income.
property tax lifecycle. You pay tax when you buy a property and are buying another. You must send an
property, every year you let the property, and later LTT return to the Welsh Revenue Authority and pay The rate of income tax you pay varies by income. The expenses you are and aren’t
when you sell it. your LTT within 30 days of completing the purchase. In England, from 2019-20, you pay no income tax allowed to claim for are complex:
Your solicitor, agent or conveyancer can do this on if you earn less than £12,500 per year. You pay the
we’ll cover those later.
your behalf, or you can file a return and pay the tax basic rate - 20 per cent of your income - on anything
yourself. after that income, up to and including £50,000. The
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04 Taxes for UK landlords: The complete guide for 2019/2020 05
You may also have to pay class 2 National Insurance, if You may have heard of ‘letting relief’. This was a
you’re running a business and: reduction in capital gains tax for landlords who lived
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in the properties they let out. Letting relief will not be
• You make more than £5,965 a year from letting
available after April 2020.
property
• Being a landlord is your main job You may still qualify for private residence relief,
however. This is a percentage reduction in capital
• You rent out more than one property gains tax, based on the number of years you lived in
• You’re buying new properties to let out a property, plus the last eighteen months before you
sold it.
You can also choose to pay National Insurance
payments even if you’re making less than £5,965 a Let’s say you lived in a property for five years, then let
year from letting property, to keep your state pension it out for 15. You would get private residence relief for 2. Tax-effective property For self-assessment, all rents and expenses from
those first five years, plus the last 18 months - that’s similar properties are pooled together into a single
topped up.
six and a half years. Six and a half years is 32.5 per cent
ownership figure. This means you have to divide your properties,
When you sell property - capital gains of the time you owned the property. You’d therefore Managing your portfolio to pay your fair share of tax rents and expenses up along the following lines:
tax gain private residence relief on 32.5 per cent of the is not easy. The next step in our tax guide for new • UK rentals - any buy to let or shared house rented
When you sell a property that’s not your home - a gain you make when you sell the property. landlords focuses on who has to pay tax, how multiple out on a shorthold tenancy
house you bought, renovated, and let out for instance properties and portfolios are taxed, and what happens
Corporation tax vs. income and capital if you make a loss. For accurate tax advice tailored • Overseas rentals - any properties abroad let on a
- and make a profit, you may be liable for capital gains
gains tax to your personal circumstances, always consult a long lease
tax. You may also be liable to pay capital gains tax on
inherited property. If you choose to do business as a limited company professional. • Holiday lets - homes located within the European
rather than as a private individual, you may pay Who pays property tax? Economic Area that qualify as furnished holiday
HMRC provide a tax calculator for working out how
corporation tax instead of income and capital gains lets. Holiday homes outside the EEA slot into the
much capital gains tax you have to pay, if any. The Whoever benefits from owning a property pays the tax.
tax. This means you could possibly have to register for overseas rental category
calculation is based on the gain - meaning the market Finding that person means following the money and
corporation tax, file a corporation tax return, and either
value of your property, minus any estate agents’ fees, dividing it between owners, or those who are paid from
solicitors’ fees, and the costs of major improvement
pay corporation tax or report that you have none to What happens if a landlord makes a
pay. it, such as property managers.
works (building an extension would be included in the loss?
calculation; redecorating would not). However, tax theory and legislation is a complicated Example
For tax purposes, you make a loss if your allowable
business. If you want to know more, the National Imagine you’re letting out a property and allowing expenses come to more than your rental income
As such the level of capital gains tax differs for basic
Landlords’ Association runs one day training courses someone else to keep the money in return for during a year. This loss is carried forward to offset
rate taxpayers, it is currently set at 28 per cent for
about the specific taxes involved - a general course managing the property. Even though you don’t receive against your future rental profits.
higher and additional rate taxpayers.
for all landlords’ tax issues, and another specifically a penny of rental income, you need to declare this on
From April 2019 onwards, non-UK residents have to focused on capital gains tax. You cannot store up losses to use when it suits you -
a self-assessment return, indicating where the money
pay within 30 days of completing the sale. The same for instance, to avoid becoming liable for higher rate
ends up - in this case, with the third party acting as
rule will apply to UK residents from April 2020. income tax. You must offset losses against available
your agent.
profits each year, until they are exhausted.
You need to do this to avoid tax mismatches. Property
Example
owners who pay higher or additional rate income tax
sometimes attempt to hide their income and reduce Your property earns £15,000 each year in rent.
their tax bills by passing off someone else - a basic
In the 2018/19 tax year, your allowable expenses
rate taxpayer - as the person who benefits from the
come to £18,000, leading to a £3,000 loss for the
income. There are ways to do this legally, either by
year. You pay no tax that year.
transferring allowances within a marriage or civil
partnership, or forming a business partnership, but In 2019/20, you bring your expenses under control
misrepresenting your tax situation by hiding where the - down to £13,000 - and make a £2,000 profit. The
money goes is not one of them. loss from the previous tax year is deducted from your
profit. You carry forward a loss of £1,000, and pay no
What about landlords with more than tax for 2019/20.
one property? In 2020/21, your expenses come down further, to
Many landlords have several properties. When this is £11,000. You’ve made a profit of £4,000. Deduct the
the case, tax liabilities are considered much the same loss of £1,000 to leave a taxable income of £3,000.
as when running any other business. You’re now liable to pay income tax.
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06 Taxes for UK landlords: The complete guide for 2019/2020 07
3. Expenses - what you can and What are self-employed landlords
can’t claim allowed to claim as income tax
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expenses?
As a landlord, you should claim property expenses.
Every pound spent on a property reduces profits, HMRC provides a checklist of allowable income tax
which reduces your income, which reduces your tax expenses for landlords. Exactly what you’re allowed
liability. It’s not tax avoidance - it’s paying your fair to claim will vary depending on whether you’re letting
share; no more and no less. a residential property, a furnished holiday let or a
commercial property.
If you’re self-employed, you’re entitled to a £1,000
tax-free property allowance, and another £1,000 Residential landlords can claim for the day-to-day
tax-free trading allowance. However, if you’re claiming expenses of running their properties, including:
your £1,000 tax-free ‘trading allowance’, you cannot • Bad debts
claim any business expenses. The allowance is there
for low income side businesses - chances are that • Business costs like phone calls, travel and running
you have more expenses and more income to handle. a home office
• Fees for services by professionals like
accountants, letting agents, solicitors or surveyors
• Ground rent on the property
You should only claim tax-free
trading allowance if your total • Insurance cover, including for buildings, contents,
income from letting property is and rent guarantee
between £1,000 and £2,000 a year. • Interest on loans and credit purchases
Business costs view new properties, but only if you end up buying the
• Repairs to and replacements for the property
property.
HMRC publishes guidance on allowable expenses for
• Services like cleaning or gardening
self-employed people. These include: Secondly, staff expenses. You can pay friends, family
Landlords can easily overlook rental income that • Utility bills and council tax (while the property is and employees who do not own a share of your
they should include in a self-assessment tax return. If • Office, property and equipment
unoccupied) property, if they’re doing work related to running
you retain money from a deposit to pay for repairs or • Car, van and travel expenses the property. The rate of pay should reflect the
cleaning when a tenant leaves, for example, this must Some of these are straightforward, but some -
work undertaken - paying your husband £50,000 to
be included in your tax return. especially business expenses, interest and repairs - • Clothing expenses
keep the books for a buy to let will be treated as tax
often trip up new landlords. We’ll cover those in more • Staff expenses
Example avoidance. You can also pay for training, as long as
detail.
• Reselling goods you’re reinforcing existing skills. Buying a book or a
You retain £500 from a £750 deposit to clean carpets Bad debts guide on property tax for landlords is an allowable
and redecorate after a tenant leaves your property. • Legal and financial costs expense, but signing up for a get-rich scheme for
You must add that £500 to the income you declare on Rent arrears are the most likely bad debt for a
• Marketing, entertainment and subscriptions property investors is not.
your tax return. You must also add it to the allowable property business.
expenses you claim on your tax return, by including A debt does not become ‘bad’ just because someone A self-employed landlord can claim some of these -
the bills for cleaning and redecoration. owes the money. The landlord must make some the costs of travel with your own vehicle and working
The same logic applies if the tenant pays for extra reasonable effort to recover the money, like launching from home - using ‘simplified expenses’. Simplified
court proceedings or passing the case to a debt expenses use a flat rate for these costs to avoid You can’t use simplified expenses
services throughout the year, like gardening costs, or
if you reduce the rent to repay a tenant for the cost collector. Once it’s clear that the debt will not be complicated calculations: they’re by far the easiest if you’re running your properties
of a repair they carried out. When you fill in your tax recovered - if the tenant declares bankruptcy, for way to claim expenses. through a limited company, or if
return, you still add the full rental income, but you also example - the debt has gone bad, and become a There are some specific things to think about here, as you’re in partnership with one.
add the bill for materials and tradesmen paid for by business expense. a landlord. For limited companies that you
the tenant as allowable expenses.
Firstly, your travel expenses. HMRC does not allow run from home, there are formulas
You are the landlord - you benefit from owning the you to claim “regular and predictable” travel between for splitting your bills between
property - the tax liability and the book-keeping your home and your place of work. This means you personal and business use.
responsibility both lie with you. can’t claim for travelling between your home and your
existing properties. You can claim for travelling to
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08 Taxes for UK landlords: The complete guide for 2019/2020 09
Fees for professionals You can claim ‘replacement of domestic items’ relief 4. Extra tax savings for married So, to benefit from Marriage Allowance, you must be
for things like: married to (or in a civil partnership with) someone
These are bills from accountants, agents, solicitors couples
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who does not pay income tax, or whose income is
and surveyors. • movable furniture; for example, beds and free-
Tax rules concerning married couples are below £12,500 a year. You must also be a basic rate
standing wardrobes
Costs related to the day-to-day running of the complicated but can enable individuals to shift their taxpayer. It doesn’t matter if you live abroad or are
business, like chasing bad debts, evicting tenants • furnishings; for example, curtains, linens, carpets assets between each other in a legal and above- receiving a pension – as long as you have a personal
in rent arrears and keeping financial records are and floor coverings board way to reduce their tax bill. allowance for income tax, you can claim Marriage
allowed. Costs related to buying, selling or planning • household appliances; for example, televisions, Allowance.
applications for a property are not allowed – they are Here we will provide an overview of some of the
fridges and freezers ways in which a couple can do this. However, given The person with the lowest income needs to claim
part of your capital gains tax calculation when you sell
• kitchenware; for example, crockery and cutlery the particularly complex nature of tax relating to Marriage Allowance online. It can take up to two
the property.
married couples it may be advisable to consult a tax months to process the claim. The person with the
Replacement of domestic items relief includes any
Interest professional to carry out a full review of your specific higher income will get their new personal allowance
sale or part exchange of the old item, as well as any
situation. when they send in their next self-assessment tax
If borrowed money is spent on business expenses, incidental costs involved in disposal or delivery.
return.
the source of the borrowing is irrelevant. This allows
To claim this relief, you must have bought the item If one of you doesn’t pay income tax:
a landlord to buy property business materials on If you both pay income tax: setting up a
a personal overdraft or credit card, and claim any
for the property, and removed the old one. You Marriage Allowance
cannot claim the initial cost of fitting out a residential partnership
interest paid as a business expense. Marriage Allowance can work for couples where one
property for rental. You also cannot claim the full If you’re both basic rate taxpayers, one option is to
Many landlords miss out on the considerable tax person is earning less than the personal allowance,
cost of upgrading the item. If you replace a £1000 set up a business partnership. Business partners
saving by failing to include borrowings against their (which increased from £11,850 in 2018/19 to £12,500
sofa with a £1200 sofa bed, you’re adding value: share responsibility for any losses the business
own home to raise cash for buy to let deposits or in 2019/20) and the other person pays income tax
you can claim back the first £1000 cost as you’re makes, any bills the business incurs, and the profits
refurbishments. at the basic rate, which in 2019/20 usually means
replacing like with like, but the remaining £200 is an from the business – but each partner only pays tax
their income is between £12,500 and £50,000.
You can only claim the interest - not the actual cash improvement and you can’t claim it. on their share. Setting up a partnership means you
The marriage tax allowance went up from £1,190
amount - and you must prove the borrowed money If you’re letting out a fully furnished property, you in 2018/19 to £1,250 in 2019/20. This means the can avoid one person moving into the higher rate for
was spent on buying land, property or equipment can claim Replacement Domestic Item relief, which potential tax saving from the higher tax earner’s bill in income tax.
for the property business or funding repairs or took the place of wear and tear allowance from 2016. 2019/20 is up to £250.
improvements. Under this new scheme, the initial cost of purchasing
domestic items for a dwelling house isn’t a deductible
expense so no relief is available for these costs. Relief
is only available for the replacement item, including:
The rules for landlords claiming • movable furniture for example beds, free-standing
tax relief on finance costs are wardrobes
changing, and the specific • furnishings for example curtains, linens, carpets,
amounts you’re allowed to claim floor coverings
will get smaller every year until • household appliances for example televisions,
2021. We’ll cover this later. fridges, freezers
• kitchenware for example crockery, cutlery
You cannot claim the costs of buying property,
Repairs and replacements
getting it into a rentable condition, or making
A ‘replacement’ means replacing or renewing part of improvements. These expenses are part of your
the fabric of the property, like a pump for the boiler, capital gains tax calculation when you come to sell
a tile for the roof, or a like-with-like kitchen refit. An the property - you had to spend that money to make
‘improvement’ is a substantial upgrade that adds what you did on the sale, so it’s subtracted from your
value: an extension, a loft conversion, or replacing gain before capital gains tax applies.
a chipboard and Formica fitted kitchen with an oak
and granite one. You can’t claim improvements as You cannot claim “regular and predictable” travel
expenses for income tax purposes. costs - like journeys between your home and office,
or between the properties you already rent.
You cannot claim wear and tear allowance on a
property you are not letting as fully furnished.
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10 Taxes for UK landlords: The complete guide for 2019/2020 11
Example If you might pay higher
As a couple, you earn £50,000 from rent. If this is rate income tax: setting up
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one person’s income, they would pay the higher rate a private limited company
of income tax – 40 per cent. 40 per cent of £50,000
Private limited companies are legally
means a £20,000 tax bill.
separate from the people who run them, have
If this rent is paid to a partnership, and each partner separate finances from the people who run them,
has a 50 per cent share, each partner receives and can keep any profits they make after paying
£25,000 in rental income. That only qualifies for the corporation tax.
basic rate of income tax – 20 per cent. 20 per cent of
The advantage of a private limited company is that
£25,000 each is £5,000 each.
you can pay yourself a salary within the basic rate
The couple’s total tax bill is £10,000. However if the of income tax, and have your partner claim Marriage
share of the property is not equal then percentage Allowance, or pay your partner a separate salary.
payments and the rules around it will differ. We advise The rest of your profits will be paid as dividends to
you contact a property tax professional to assess people with a share in the company. Shares can also 5. New tax changes for buy to let the time they lived in the property plus the final 18
your percentage split. be bought, sold and transferred if you want to bring months. If the changes go ahead, this 18 month relief
more members of your family into the company. It’s a landlords period will come down to just nine months. Lettings
You’ll need to choose a name for your business
way to make sure you don’t end up paying income tax As if buy to let tax wasn’t fiddly enough, the rules relief will also only apply for landlords who lived with
(it can’t be too similar to an existing company’s
at the higher rate. also change fairly regularly. A range of new measures their tenants while they were renting the property out.
name), and choose a ‘nominated partner’ who will
be responsible for sending the tax return for the The disadvantage is that it takes more work to set up were introduced in the 2019 tax year for landlords to If these changes go ahead, they will be introduced in
business. The nominated partner must register the a private limited company than a partnership. You’ll familiarise themselves with. April 2020.
partnership with HMRC. need to choose a company name and registered These include changes to mortgage interest tax relief, Mortgage interest tax relief
address, appoint directors and a company secretary, personal allowance, capital gains tax allowance and
Both members of a partnership must be registered
establish and issue at least one share, and draw up a proposed changes to how capital gains tax is paid on The government began phasing out mortgage
with HMRC. Both partners must send their own self-
memorandum and articles of association which set rental properties you used to live in. interest tax relief by 25 per cent each year in 2017,
assessment tax returns and pay income tax.
the rules for running the company. planning to end it completely by 2021. As a result, this
It’s a good idea to set up as a limited liability Personal allowance increase is the last year that landlords can deduct the interest
It’s only worth doing if you make more than £92,700
partnership (LLP). Partners in an LLP aren’t personally The personal allowance for 2019 to 2020 is paid on their mortgage from their income, although
a year in rental income (the basic allowance for two
liable for debts the business can’t pay – this keeps increasing from £11,850 to £12,500. The personal they can only deduct 25 per cent of the interest paid.
people).
you safer in the event that your business struggles in allowance refers to income you earn from your Next year you won’t be able to deduct any.
future. property before paying tax on it. A higher allowance Instead, landlords will be given a 20 per cent tax
effectively means holding onto more of your profits. credit for all their property finance costs. The aim
Because the allowance has increased, so has the of the policy is to increase the amount of tax paid
higher-rate threshold. You now have to earn more by higher or additional-rate landlords, who used to
than £50,000 before you enter the 40 per cent tax receive generous tax deductions. Basic rate tax-
bracket. payers should end up paying more or less the same
as before.
Capital gains allowance increase
As mentioned earlier in this guide, capital gains tax Managing your liability
is paid when you sell a property. The capital gains Understanding your own tax liability will help you to
tax allowance is the amount of profits you can earn make the most out of your property assets. As we’ve
before paying tax. discussed, you pay tax when buying, letting or selling
The government is increasing the allowance from a property; you become liable for higher tax brackets
£11,700 to £12,000. Anything above the allowance based on the value of the property and your overall
limit will be taxed at 18 per cent for basic rate income. Managing your liability is a matter of knowing
taxpayers and 28 per cent for higher or additional exactly what you can and can’t claim as expenses.
rate taxpayers. While there could be further buy to let tax moves,
There are also proposed changes to how capital keeping accurate records of your costs, staying
gains tax is paid on properties that you used to live in. abreast of changes and always running your
As mentioned earlier, property owners who are selling decisions past a property tax expert will leave you on
a second home can claim private residence relief on the right side of HMRC.
Whether you have a single property or an entire portfolio, we provide comprehensive cover at a competitive price
For more resources and advice, please go to our website https://hamiltonfraser.co.uk/knowledge/ Total Landlord Insurance Premiere House, 1st Floor, Elstree Way, Borehamwood, WD6 1JH T: 0800 63 43 880 E: enquiries@hamiltonfraser.co.uk www.hamiltonfraser.co.uk/landlord-insurance Hamilton Fraser Total Landlord Insurance is a trading name of HFIS plc. HFIS plc is authorised and regulated by the Financial Conduct Authority. November 2019
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