What tax issues affect buy-to-let investors?

Thu 05 May 2016

By Jo White
Tax Consultant, Spofforths

Question: I am thinking of buying my first rental property personally. Can you explain to me what tax issues I should be aware of?

Answer: I think the best way to explain this is to run through the different stages of being a landlord from purchase through to sale.

When you purchase a residential property you will incur a Stamp Duty Land Tax (“SDLT”) liability based on the amount paid for the property. If you own more than one residential property at the point you purchase your Buy-To-Let property, then you will pay an additional 3% SDLT on the purchase price. When borrowing money to purchase the property you will incur arrangement fees, although these can be set aside and deducted against your rental profits.

The costs associated with the purchase, including SDLT and legal fees, are not deductible against any rental income but instead can be used to reduce any further tax liability when the property is sold.

Once the property is let you will pay Income Tax on any rental profits made, which are assessed on a tax year basis. Costs associated with running the property can be used to reduce your profits including (but not limited to) Letting agent fees, mortgage interest, insurance, repairs and maintenance, travel, service charges and accountancy costs. Where you own the property jointly you will be taxed on the level of your ownership, subject to special rules for spouses and civil partners.

From April 2017 the amount of tax relief you can claim on your finance costs will be restricted. These rules are being phased in over 4 years so the full impact will be apparent in the 2020-21 tax year.

After a while, you could decide to either sell the property or gift it to someone. Both of these transactions could trigger a Capital Gains Tax liability, which is payable based on the difference between the sales price (market value of the property when it is gifted) and the original cost to you. However, there are some ways of mitigating this liability, for instance, any improvement works that are still in existence when the property is sold can be claimed for, plus where you incur agent fees and legal costs on the disposal, these costs can be deducted against any capital gain.

Capital Gains Tax on the sale of residential property is charged at 18% or 28%, this is compared to the new Capital Gains Tax rates of 10% or 20% announced in the 2016 Budget, which applies to the sale of other assets.

Where a property is gifted to another person and the mortgage is transferred to them, a possible SDLT liability could arise based on the debt being passed. This would be the case even if the gift was to a spouse or civil partner as there is no exemption for SDLT purposes.

There are clearly a fair few things to be aware of over the duration of your Buy-To-Let ownership, so it makes sense to go into your new purchase with your eyes open, getting tax advice when needed.

For more specialist tax advice please contact Spofforths.