Mastering property tax: an essential guide for landlords

Landlords must account for various taxes when they buy, sell and rent property.

Of course, any money received as rent is considered income, but there are plenty of expenses you can deduct to reduce your tax bill. Landlords also need to consider Stamp Duty Land Tax (SDLT) and Capital Gains Tax (CGT).

Staying ahead of taxes enables effective planning, streamlining the whole process of managing rental properties.

Here, we’ll overview the key property taxes that landlords need to be aware of.

 

Income Tax on rental income

Any income you earn from rental properties is subject to Income Tax.

However, you are allowed to deduct certain expenses from your gross rental income before calculating the tax due. These are referred to as ‘allowable expenses,’ and include:

• Mortgage interest: If you have a mortgage on your rental property, you can deduct some of the interest portion of your mortgage payment. However, it’s important to note that only the interest portion is deductible, not the principal repayment.
• Property repairs and maintenance: Any costs you incur for the repair and maintenance of the property are deductible. This includes anything from fixing a broken window to repainting the property.
• Insurance premiums: The cost of insuring the property is also deductible. This includes buildings insurance and contents insurance if you are renting the property.
• Letting agent fees: If you engage a letting agent to manage your property, any fees you pay them are tax deductible.
• Utility bills: If you include utilities in the rent charged to your tenants, you can deduct these costs from your income tax bill.

After you’ve deducted these allowable expenses from your rental income, you need to declare the net amount on your self assessment tax return. Make sure you keep accurate notes and evidence of all the above costs.

The tax on your rental income will be calculated based on your marginal tax rate. This rate can be either 20%, 40%, or 45%, depending on the total amount of income you’ve earned in the tax year.

 

Stamp Duty Land Tax (SDLT)

SDLT is a tax that is payable when you purchase a property in England or Northern Ireland. Land and Buildings Transaction Tax (LBTT) is the equivalent in Scotland and Land Transaction Tax (LTT) in Wales.

Here’s why SDLT is a special consideration for landlords: if you’re purchasing an additional property that is not intended to be your primary residence – like a rental property – there’s a 3% surcharge on top of the standard rates. 

 

Capital Gains Tax (CGT)

CGT comes into play when you sell a rental property. This tax is applied to the profit you make from the sale, which is the difference between the price you paid for the property and the price you sold it for.

As of 2023, the rates stand at 18% for basic rate taxpayers and 28% for higher and additional rate taxpayers. The rate applied depends on your total taxable income, including the gain from the sale of your property.

So, if your profits push your income into a higher tax bracket, you may find that some of your gain is taxed at the higher CGT rate.

However, you’ll have a personal exempt amount for CGT, which is currently £6,000, although this will reduce to just £3,000 in April 2024. This means you won’t have to pay any CGT up to this amount each tax year. Any profit above the Annual Exempt Amount will be subject to tax.

Furthermore, you can reduce your CGT bill by claiming certain reliefs or by deducting costs associated with the property.

These costs can include what you paid for the property and costs incurred when buying, improving, or selling it. Remember to keep a record of these expenses.

 

Council Tax

Generally, you’ll be responsible for paying the Council Tax on any unoccupied properties you own. That means if there are periods between tenancies where the property is empty, it will fall on you to make the Council Tax payments.

However, when you have tenants living in the property, it’s typically their responsibility to pay the Council Tax – but this needs to be specified in the rental agreement. If you include Council Tax as part of the rental fee, you should also clarify that in the agreement.

Additionally, if you have a House of Multiple Occupancy (HMO) property, where tenants rent individual rooms, you, as the landlord, will be typically responsible for Council Tax.

 

Understanding your tax obligations

Understanding your tax obligations as a landlord can be complex, but it’s crucial to ensure you’re compliant with the law and not paying more tax than necessary.

It’s always a good idea to seek professional advice if you’re unsure.

An accountant or tax adviser can help you navigate the tax landscape and ensure you take advantage of any allowances, deductions, or reliefs that could reduce your tax bill.

Accurate record-keeping is essential, particularly for expenses for Income Tax purposes.

Talk to us about your tax liabilities as a landlord