An Easy Guide to Property Tax for Landlords

Talitha Burgess takes you through your essential guide to tax. If you’re a landlord, we’d like to offer some clarity on the taxing matter of tax.

Is this the most exciting blog that you will ever read?

Most likely, no.

But if you’re new to renting out your property, or even if you’re outsourcing your accounts to a trusted tax adviser,  understanding the basic structures under which HMRC can and does take money from you is a valuable building block in your knowledge. It could also help you keep on top of your finances.

Seek Advice

Firstly, we’re not accountants. Clarity is an established property rental business.

Whilst we know how best to support you as a landlord in every aspect of your portfolio, including your general tax obligations, your personal circumstances are unique and will require tailored advice; the expertise that only tax specialists can provide. What’s more, there are endless “ifs” and “buts” relating to the finely nuanced elements that those lovely tax people like to impose on us.  

So, do take advantage of the highly qualified and wise counsel out there.

By the way, did you know that there is an official Office of Tax Simplification? I wonder what they do all day.

What Taxes Do I as a Landlord Pay?

There are THREE key stages in your tax lifecycle:

1. When you buy a property
2. When you let your property
3. When (or if) you sell it

Let’s look at each of these in a little more detail:

1. Buying a property

Stamp duty. A rather quaint, old-fashioned name for the tax you have to pay to HMRC when you buy a property. The exact amount will depend on the cost, its location and circumstances. For buy-to-let investors, such as your good self, if you are buying your second or subsequent property you will need to pay an extra 3% in stamp duty over and above the standard tiered rate.

(First-time buy-to-letters are exempt from the extra tax percentage levy.)

You’ll need to be a prompt taxpayer here; stamp duty land tax (to give it its full name) will be due within 14 days of completing your purchase. Your solicitor or conveyancer should be able to do this on your behalf.

2. Income Tax on Your Property

If you make money from letting your property, you will need to submit a self-assessment tax return, depending on your total income.

In the Spring Budget, the Chancellor froze income tax thresholds until 2026.That is, your personal allowance of £12, 570 – the amount you can earn before paying tax – is set in stone for the next few tax years.

Your overall income is relevant here; the returns from your property won’t be calculated separately from your other earnings, say if you have another business, or a job. The normal starter rate, basic rate and higher rates apply, as usual.    

Something positive: as a landlord, you’re entitled to a £1,000 tax-free property allowance. So, if you make less than £1,000 a year from letting, you don’t need to inform HMRC. Also, if you don’t run a limited company and you’re self-employed, you can also benefit from a £1,000 tax-free trading allowance (although this is generally for lower-income landlords).

If you have more than one property, all income and expenses are pooled together into a single figure.

Just a quick heads-up on National Insurance. You’ll need to make Class 2 NI payments if you earn more than £6,475 from property rentals, being a landlord is your main profession, you rent out more than one property, and you’re buying new homes to let.

3. Selling Your Property

This is all about Capital Gains Tax.

If you sell a property you’ve been renting out, you have to pay CGT. Your current tax-free allowance is £12,300, and there are different percentage amounts payable, once you pass your tax-free threshold, depending on your basic rate or higher rate taxpayer status.

Your accountant will be able to calculate the amount you pay, but broadly, this is based on the gain, namely the market value of your property, minus estate agents’ and others’ fees, as well as the costs of any major work you may have had done.

You’ll be liable for your CGT bill within 30 days of sale completion. Not long, is it?

Slight caveat: if you’ve lived in the property yourself before you’ve sold it, you could quality for private residence relief, broadly based on how long you were there before becoming a landlord.

Let’s talk Corporation Tax. If you run your business as a limited company, corporation tax applies. A couple of things: firstly, currently levied at 19% on company profits, it’s going up to 25% from 2023 if your taxable profits are above £250,000. And secondly, as of April this year, you’re obliged to adhere to the government’s Maxing Tax Digital rules – with all the compatible software to make things quicker and easier.

Now let’s go onto:

Claimable Expenses

What you can claim – and what you can’t. To be fair, we can’t cover everything here as it’s such a huge topic, but here’s an overview.

There are certain business expenses that you can set against your rental income to reduce your tax bill. These include:

• Bad debts (eg if your tenant declares bankruptcy)
• Phone calls, travel costs, running a home office
• Ground rent
• Professional fees, such as letting agents, accountants, solicitors, surveyors etc
• Insurance cover
• Interest on loans and credit purchases
• Property repairs or replacements
• Utility bills and council tax (during void periods)
• Services such as cleaning and gardening

Be Aware!

There’s a degree of small print linked to the above.

For instance “normal” travel costs to your existing properties aren’t tax deductible; only those to view new properties. Plus, you can’t claim tax relief on improvements – a loft extension could be a good example here, or a “nicer” new kitchen.

But you can claim replacement domestic item relief if you’re renting a fully furnished property and need to buy new furniture, say.

Just out of interest, regarding deposits, the money you retain from your tenant must be declared as income.

Your Status

We can’t advise you on this, but it’s worth talking to your accountant about whether setting up as a limited liability partnership if you’re working with another person, and/or setting up a private limited company. Putting your operation on a sound, legal footing offers a degree of protection, as well as a legitimate standing in the lettings sector.

Is tax complicated for landlords? It can be. So get on top of everything with the expert guidance you need. It could be the best thing you ever did.