Stamp duty land tax (SDLT)
This is a one-off payment made on purchase of the property and is calculated according to the price of the property, plus a 3% surcharge if you already own a property (this includes your home). It’s payable within 30 days of taking possession of the property.
Your profit from letting property is liable for tax of between 20% and 45%, depending on your total income and subject to any allowances. The first £11,850 of any earnings are not taxed (2018 to 2019) so if you have another job this may or may not use up this allowance and mean all your earnings as a landlord are taxed.
· The first £1,000 of a property you personally own is tax free
· Any annual profit from property over £2,500 must be declared on a self-assessment tax return
· For annual profit between £1,000 and £2,500, you should contact HMRC for advice.
There have been some changes to tax relief for landlords with the phasing in of Section 24. Previously, you could offset all the interest on their mortgage or other loans against your earnings, at your usual tax rate. With the phasing in of Section 24, only a 20% tax credit is available by 2020/21:
· for the tax year 2017-18, you can offset 75% of your interest payments against earnings
· for the tax year 2018-19, you can offset 50% of your interest payments against earnings
· for the tax year 2019-20, you can offset 25% of your interest payments against earnings
· for the tax year 2020-21, none of your interest payments will be able to be offset against a higher tax band
If you pay the higher tax rate, or are almost at that level, you’d be advised to seek the advice of an expert in landlord tax as the changes may push you into a higher tax bracket.
You can still offset other expenses against your income, including landlord insurance, agent fees, maintenance and other costs of running a business.
Changes to wear and tear allowance
Although this relief has now been stopped, you can still claim Replacement Domestic Item relief when replacing items such as carpets and curtains, as well as for any furnishings you provide such as fridges and sofas. This is not available when initially furnishing the property, only on “like for like” replacements. For example, if the property currently has a two-seater settee and you decide to replace it with a three-seater sofa bed, you can only claim relief on the cost of a similar two-seater settee, as the additional cost is regarded as an upgrade.
Capital gains tax
This is the tax you have to pay on the capital growth, when you sell a property – for example if you purchased a £100,000 property several years ago and it is now worth £175,000, the capital growth is £75,000. This is the amount you will be taxed on, regardless of how much equity is left in the property.
Assuming you are registered for self-assessment, payment is due in the same timeframe as income tax; in other words, if you sell a property now, in the 2018-19 tax year, any capital gains tax payable will be due by 31st January 2020.
As with income tax, you have an annual allowance – for the 2018-19 tax year this is £11,700, or £5,850 for trusts. If the gain is less than this amount, you will not have to pay capital gains tax, as long as you have not previously used the allowance in the same tax year. However, you should still declare it on your tax return if you are registered for self-assessment and if the sale price of the property was more than £46,800 (four times the allowance).
If you make a loss on a property, this can be deducted from any gains you make on other properties. You don’t need to report losses in the same tax year, so can hold on to them until required, as long as you declare them within four years of the end of the tax year in which you sold the loss-making property.
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