Re-introducing UK Landlord Tax: accountancy for landlords

Oct 9, 2020

UK Landlord Tax has always been a firm that likes to share its knowledge but this year, we’re kicking it up a notch.

Alongside the launch of our new website, we’ve taken some time to reflect on how we can better use this blog to help landlords.

We don’t mean only those landlords who are already our clients but also those who, frankly, should be, because their current accountant isn’t giving them the support and information they need.

This was something that was happening anyway – we started working on the new website last autumn – but what’s happened in 2020 only hardened our resolve.

We’ve spent most of the past three months on the phone, answering emails, trying our hardest to help our clients understand how they can access financial support during the COVID-19 crisis.

What I’ve learned, apart from just how brilliant and hard-working my team is under pressure, is that people really value clarity, directness and honesty.

So, that’s what you’ll find here.

Not waffle. Not jargon. Not long winded technical explanations.

No, instead, you’ll get information that makes sense and inspires you to take action that will help you enjoy being a landlord again.

You’re not imagining it: property tax is complicated

When I talked to my team they all agreed that one of the most enjoyable parts of being an accountant is talking to clients and answering their questions about property tax.

At the start of the call, they might be confused, maybe anxious. Once we’ve listened – let them talk it out – that’s when we get to make use of all the skills and experience we’ve gained over the years to solve their problem.

As far as we’re all concerned, there’s no such thing as a daft question. People sometimes say things like, ‘Sorry, I ought to know this’, to which our answer is, no, there’s no reason you should.

Property tax is complicated and the communications that come out of government aren’t as clear as they should be.

The problem is the way policy is made.

First, you design a simple, elegant system that’s cheap and easy to administer.

Next, you start to look at all the exceptions to the simple rules you’ve drawn up and try to plug the gap by making amendments and additional clauses.

Before you know it, a couple of centuries later, you’ve got hundreds of ifs, buts, tax reliefs, allowances and exemptions, all contradicting or overriding each other.

On top of that, there’s the problem of legalese and financial jargon – a world in which, for example, ‘domiciled’ doesn’t just mean ‘living in’ but something much more precise.

Accountants have a reputation for being obsessed with detail and it’s true, we are. We have to be.

That doesn’t mean you should have to be, though.

A good property tax accountant will act as a kind of translator, turning guidance from HMRC into plain English and explaining how you can act upon it.

Aspects of property tax

In the coming months, we’ll be shining a light on key aspects of tax for landlords, including this year’s tax changes, dealing with HMRC, understanding expenses, and more.

Here are some of the main areas of property tax in the UK, explained in brief.

Tax on your profits

When you let property as an individual, rather than as a limited company, you’ll need to pay income tax on any profit you make. This is your rental income, minus any expenses or allowances you can claim.

The profit is then added to your non-savings income (earnings from employment, self-employment or other income) which is then subject to Income Tax.

If you let your property through a limited company, the company will be liable to corporation tax on the profits after all expenses including mortgage interest.

The UK rate of corporation tax is currently 19%.

If you draw money out of the company, you’ll pay income tax at the dividend rate on any drawing which is currently 0% on the first £2000 of dividends and then the dividend rate below at the marginal rate after taking into account your other income.

In 2020/21, the rates of income tax in the UK are as follows:

Band Taxable income Rate Dividend Rate
Personal allowance* Up to £12,500 0% 0%
Basic rate Over £12,500 to £50,000 20% 7.5%
Higher rate Over £50,000 to £150,000 40% 32.5%
Additional rate Above £150,000 45% 38.1%

* All UK residents and British citizens are entitled to the personal allowance. The personal allowance is reduced by £1 for every £2 that your adjusted net income is above £100,000. Non British/EU citizens who are not resident in the UK are not entitled to the personal allowance unless the Double Tax Treaty between the country and the UK allows a claim. In the case of most countries, the Double Tax Treaty requires you to be resident and a citizen of the same country. For example, a Canadian citizen living in Canada would be entitled to the UK personal allowance but would not be entitled to it if they lived anywhere else in the world apart from the UK.

Deductible expenses

There are a number of costs you can deduct from your rental income to work out your profits, but the general rule is that costs must be incurred ‘wholly and exclusively’ for the purposes of renting out the property.

General maintenance and repairs are included, for example, but not improvements.

We’ll cover what you can and can’t claim in more detail in blog posts over the next few months.

From 2020/21, mortgage interest is not deducted as an expense for individuals. Instead the tax on the profit excluding finance costs is calculated using the rates above and then 20% of the mortgage interest (restricted to the level of taxable profit) is deducted from the net tax liability. Basic rate taxpayers are not affected but it has increased the tax liability for higher and additional rate taxpayers.

If the property is held in a limited company then finance costs are deducted in full.

Buying and selling rental property

You’ll need to pay some form of tax when you buy a property, with different rules and exemptions depending on the part of the UK you’re buying in.

In England and Northern Ireland, you’ll pay stamp duty land tax. For properties in Scotland, it’s land and buildings transaction tax, and for Wales it’s land transaction tax if the sale was completed on or after 1st April 2018.

Capital gains tax may also be due on the gain you make when you sell a property.

You are required to report the sale of a property other than your main residence to HMRC and pay any capital gains tax within 30 days of completion of the sale.

Property tax if you live abroad

Most of these rules get more complicated if you’re renting UK property from abroad, and there are other things to think about when it comes to your residence status and the way you pay tax.

You may need to use HMRC’s non-resident landlord scheme, for example, to apply to receive rent without tax deducted.

Keep an eye on our blog for in-depth guidance for non-resident landlords.

If you’ve got questions…

We’ve got answers. At UK Landlord Tax, we’re interested in every aspect of property tax and we want to help out, whether you’re a first-time landlord or starting to build a small property portfolio.

We also offer specialist guidance for expats who want to make sure all their paperwork is being covered back home.

Get in touch if you want to know more about any of the topics covered here, and to find out how they apply to you.

This could be replaced with a link to relevant posts once they’re up.

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Got a question for our landlord tax experts?

If there’s a property tax issue that has you puzzled or worried, get in touch. Everyone on our team loves to talk, especially when it helps people like you find peace of mind.