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Paying tax on rental profits and reducing CGT

ioscorpio
Posts: 2,360 Forumite


in Cutting tax
I received this as part of a newsletter from https://www.iaprops.com
Paying tax on your rental profits
For many readers, this will be the first year that you will have to pay tax on the profits from your rental income. It's always great to see how much money you have made in the first year but it's important to keep your bill as low as you possibly can.
In this newsletter I am always going on about having a competitive edge at each step of the buying and renting process.
Tax on your rental income definitely falls into this category. You can ignore it and hope it will go away – it won't – or you can spend some time getting to know what you can and can't claim. You must become an expert in all aspects of property investment.
Of course tax has been made overcomplicated on purpose. We don't want or need all these stupid tax rules, but pretty much every government that I've ever known has done its utmost to ensure you don't understand the rules. Endless budgets, over complicated regimes, constantly changing thresholds.
Divide and conquer. Most people do not understand the tax regime in this country. Over the last few years we have seen many accountants come out and say quite openly that even they don't understand some of the rules.
Don't be put off. Learn the key points that relate to tax on rental income and avoid becoming a victim. It's your money and you've worked hard for it.
Fortunately, the tax rules that apply to property rental income are not that onerous and I'm sure that you won't find this at all difficult.
OK here we go.
All rental income is going to be taxed.
If you add up all your rental income for the year, that's usually 6th April to 5th April, you will have to pay tax on that figure.
The good news, as you are no doubt aware, is that you are allowed to deduct certain items of expenditure from that rental income. This reduces the total figure and therefore reduces the tax payable.
What happens if you end up with a minus figure? Well this figure can be carried forward and will reduce the tax on future profits.
So what can you claim? These are the main items;
1. Interest payments on your mortgage. If you have an interest only mortgage, then you can claim all of the mortgage fees for the year. Note, any payments that reduce your capital loan cannot be claimed.
Your bank or building society will send you a statement each year which shows exactly how much interest you have paid on your loan, so this bit couldn't be easier. The work is done for you.
2. Managing agents fees.
3. Insurance (buildings and contents if furnished).
4. If you have gas – your annual Corgi safety check.
5. Service charges (if not paid by the tenant).
6. Any legal fees associated with the drawing up of leases.
7. Utility bills (water, gas, electric).
8. You cannot claim relief on the initial cost of furnishing a place, but you can claim for subsequently replacing items. If you don't like this idea, you have an alternative. You can claim 10 per cent of all rental income as ‘wear and tear'. Remember though, you cannot claim both.
9. Reasonable expenses relating to trips to visit the properties to cover items like petrol. Don't be silly here, but do claim some money in this category to cover costs, particularly if your buy-to-let properties are a long way from where you live.
Reducing your CGT when you sell
So what about all those other expenses you incurred in buying the property in the first place. Can't you claim those costs too?
Well you can, but not yet.
If you ever sell the place, you will have to pay capital gains tax on any profit you make.
But again, the good news is you are allowed to deduct various items which will reduce the gain and hence the amount of CGT you ultimately pay.
So you need to keep a record of these allowable items which include:
Legal fees relating to the purchase.
Estate agents fees.
Accountancy fees.
Stamp Duty.
Any bill for improvements to the property, provided these have not already been claimed in the previous section against income tax.
The final way you can reduce your CGT, and it's a good one, is called taper relief.
Basically, the longer you have owned the property, the less you pay in Capital Gains Tax. There is a 5 per cent deduction on assets that are held for more than 3 years and this relief increases by 5 per cent for every year the asset has been owned, up to a maximum of 40 per cent.
All of the above relates to landlords who own the properties directly, rather than through a limited company. If you own the property through a limited company, then there is an entirely different tax structure.
Earnings below £10,000 are tax free, whilst up to £50,000 they incur tax on a sliding scale up to 19 per cent.
Between £50,000 and £300,000 the tax rate is 19 per cent.
Above £300,000 (nice!) the rate goes up in stages, up to 30 per cent for sums over £1.5 million (nicer still eh!)
Of course, most people operating through a limited company will have an accountant advising them anyway, but it's good to know the options.
Whether you complete your own tax return or use an accountant, don't waste good money on basic book-keeping activities.
You don't need to pay an accountant to calculate any of the figures I have covered here, not unless you've got money to burn.
Do all the basic figures yourself and supply them to your accountant with all the supporting documentation. By all means pay your accountant for financial planning and tax advice, but not to do basic book-keeping. It will also help you to understand how you can keep your tax bill as low as possible each year – and that can't be a bad thing, whichever way you look at it.
Remember, all the tax rules I have given you apply to residential property, not to commercial buildings which have a different set of rules altogether.
Paying tax on your rental profits
For many readers, this will be the first year that you will have to pay tax on the profits from your rental income. It's always great to see how much money you have made in the first year but it's important to keep your bill as low as you possibly can.
In this newsletter I am always going on about having a competitive edge at each step of the buying and renting process.
Tax on your rental income definitely falls into this category. You can ignore it and hope it will go away – it won't – or you can spend some time getting to know what you can and can't claim. You must become an expert in all aspects of property investment.
Of course tax has been made overcomplicated on purpose. We don't want or need all these stupid tax rules, but pretty much every government that I've ever known has done its utmost to ensure you don't understand the rules. Endless budgets, over complicated regimes, constantly changing thresholds.
Divide and conquer. Most people do not understand the tax regime in this country. Over the last few years we have seen many accountants come out and say quite openly that even they don't understand some of the rules.
Don't be put off. Learn the key points that relate to tax on rental income and avoid becoming a victim. It's your money and you've worked hard for it.
Fortunately, the tax rules that apply to property rental income are not that onerous and I'm sure that you won't find this at all difficult.
OK here we go.
All rental income is going to be taxed.
If you add up all your rental income for the year, that's usually 6th April to 5th April, you will have to pay tax on that figure.
The good news, as you are no doubt aware, is that you are allowed to deduct certain items of expenditure from that rental income. This reduces the total figure and therefore reduces the tax payable.
What happens if you end up with a minus figure? Well this figure can be carried forward and will reduce the tax on future profits.
So what can you claim? These are the main items;
1. Interest payments on your mortgage. If you have an interest only mortgage, then you can claim all of the mortgage fees for the year. Note, any payments that reduce your capital loan cannot be claimed.
Your bank or building society will send you a statement each year which shows exactly how much interest you have paid on your loan, so this bit couldn't be easier. The work is done for you.
2. Managing agents fees.
3. Insurance (buildings and contents if furnished).
4. If you have gas – your annual Corgi safety check.
5. Service charges (if not paid by the tenant).
6. Any legal fees associated with the drawing up of leases.
7. Utility bills (water, gas, electric).
8. You cannot claim relief on the initial cost of furnishing a place, but you can claim for subsequently replacing items. If you don't like this idea, you have an alternative. You can claim 10 per cent of all rental income as ‘wear and tear'. Remember though, you cannot claim both.
9. Reasonable expenses relating to trips to visit the properties to cover items like petrol. Don't be silly here, but do claim some money in this category to cover costs, particularly if your buy-to-let properties are a long way from where you live.
Reducing your CGT when you sell
So what about all those other expenses you incurred in buying the property in the first place. Can't you claim those costs too?
Well you can, but not yet.
If you ever sell the place, you will have to pay capital gains tax on any profit you make.
But again, the good news is you are allowed to deduct various items which will reduce the gain and hence the amount of CGT you ultimately pay.
So you need to keep a record of these allowable items which include:
Legal fees relating to the purchase.
Estate agents fees.
Accountancy fees.
Stamp Duty.
Any bill for improvements to the property, provided these have not already been claimed in the previous section against income tax.
The final way you can reduce your CGT, and it's a good one, is called taper relief.
Basically, the longer you have owned the property, the less you pay in Capital Gains Tax. There is a 5 per cent deduction on assets that are held for more than 3 years and this relief increases by 5 per cent for every year the asset has been owned, up to a maximum of 40 per cent.
All of the above relates to landlords who own the properties directly, rather than through a limited company. If you own the property through a limited company, then there is an entirely different tax structure.
Earnings below £10,000 are tax free, whilst up to £50,000 they incur tax on a sliding scale up to 19 per cent.
Between £50,000 and £300,000 the tax rate is 19 per cent.
Above £300,000 (nice!) the rate goes up in stages, up to 30 per cent for sums over £1.5 million (nicer still eh!)
Of course, most people operating through a limited company will have an accountant advising them anyway, but it's good to know the options.
Whether you complete your own tax return or use an accountant, don't waste good money on basic book-keeping activities.
You don't need to pay an accountant to calculate any of the figures I have covered here, not unless you've got money to burn.
Do all the basic figures yourself and supply them to your accountant with all the supporting documentation. By all means pay your accountant for financial planning and tax advice, but not to do basic book-keeping. It will also help you to understand how you can keep your tax bill as low as possible each year – and that can't be a bad thing, whichever way you look at it.
Remember, all the tax rules I have given you apply to residential property, not to commercial buildings which have a different set of rules altogether.
0
Comments
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Iomexico, thank you for this - must have taken ages to type out, but it is excellent advice, just the sort of thing I need as I will be renting out my first house next year. Very grateful you took the trouble to post this information.
FTS0 -
I didn't have to type it out, it was an e-mail newsletter, so just cut and pasted it. Glad it's been of some help.0
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cheers m8. I am soooo greatful 4 aal this info. Where can i find such similar interesting and important info?0
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Earnings below £10,000 are tax free, whilst up to £50,000 they incur tax on a sliding scale up to 19 per cent.
Between £50,000 and £300,000 the tax rate is 19 per cent.
Above £300,000 (nice!) the rate goes up in stages, up to 30 per cent for sums over £1.5 million (nicer still eh!)
Really Excellent Post!!!! Thanks I am sure it is much appreciated by many!
One question, I am thinking of starting BTL with a friend and doing a Limited company, would this be the best way for tax reasons over self employment taxation?
The other thing no one ever mentions VAT with regard to BTL, is VAT never applicable and one would never need to be registered?0 -
Well done, thanks for the post
Highly recommended.
(Is there a box that can be ticked to highlight this?)Old Faithful we roam the range together,
Old Faithful in any kind of weather,
When the round up days are over,
And the Boulevard’s white with clover,
For you old faithful pal of mine.
Giddy up old fella cos the moon is yellow tonight,
Giddy up old fella cos the moon is mellow and bright,
There’s a coyote crying at the moon above,
Carry me back to the one I love,
And you old faithful pal of mine.0 -
Not sure if this is the right place to ask this question - first time on the chat forum!
We owned a buy to let property for about 2 1/2 years and although it was let out for some of this period, we actually made a loss on paper (ie rental income was less than mortgage interest payments + wear and tear allowance etc). Can I set this loss off against the tax I pay as an employee? I have also this year carried out some occasional, locum, self employed work, (for which i will fill in a tax return), can i set the loss off against this income and therefore reduce the tax i will pay on this income?
second question is about CGT! I read in a buy-to-let book (published in 2002) that if the proceeds from the sale of a buy to let property were reinvested in another business (including another buy to let property) within 2 years, then there was no CGT payable. Does anyone know if this is correct? sounds too good to be true!0 -
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goodmillie wrote:Not sure if this is the right place to ask this question - first time on the chat forum!
We owned a buy to let property for about 2 1/2 years and although it was let out for some of this period, we actually made a loss on paper (ie rental income was less than mortgage interest payments + wear and tear allowance etc). Can I set this loss off against the tax I pay as an employee? I have also this year carried out some occasional, locum, self employed work, (for which i will fill in a tax return), can i set the loss off against this income and therefore reduce the tax i will pay on this income?
second question is about CGT! I read in a buy-to-let book (published in 2002) that if the proceeds from the sale of a buy to let property were reinvested in another business (including another buy to let property) within 2 years, then there was no CGT payable. Does anyone know if this is correct? sounds too good to be true!
You can't offset rental losses against anything other than future rental losses. And if you have one property, then sell it, then have no property for a while, then buy another, I'm not sure that would count as an ongoing rental business and you may not even be able to claim the losses against that.
Not sure about the CGT point!0 -
MarkyMarkD wrote:You can't offset rental losses against anything other than future rental losses.
Firstly, if the loss arises as a result of Capital Allowances, then the lower of the total loss and the Capital Allowances may be offset against other income. (However, Capital Allowances are not usually available on residential property, unless it is furnished holiday let.) Secondly, losses on furnished holiday lettings can also be offset gainst other income.
On the CGT point, I suspect the guide was referring to furnished holiday lettings. Gains on these CAN be rolled over against purchases of new furnished holiday lettings (or other qualifying business assets). But on typical buy to let properties you can't do this.0
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