Buy to Let Tax
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Buy to Let Tax

Dealing with Taxation

There are two separate taxes which affect landlords:

•  income tax

•  capital gains tax (CGT).

Looking at Income Tax

Income Tax is a tax levied on money (or payment in kind) you receive as income after certain allowances have been deducted. The profit you make on rent received from your property is deemed income by the Inland Revenue and is therefore liable to income tax.

Because the rules on what is permitted in allowances are complicated, and further exacerbated by the probability that the rental income is only part of your overall income, individual situations can be very complex and professional advice may be worth seeking. The following section on income tax, as it applies to rental income, gives a basic outline of the fundamental principles. Further reading can provide a more in-depth account.

Clarifying the basic principles

In determining your liability to income tax as a result of receiving rental income, an assessment of your annual profit (or loss) is required. This is done by:

1. Totalling all your rental income for the tax year, including any payments in kind.

2. Subtracting your allowable expenses and certain other allowances.

The resulting profit figure now combines with your income from other sources to assess your overall liability to income tax under the rules in force at the time.

Further information

•  You must assign your rental income and expenses to the correct tax return period. Tax return periods always run from 6 April of one year through to 5 April of the next. The rental income and expenses you use should be relevant to the period of the return form you are completing.

•  Rental income is dated according to when it is earned and not to when you actually receive it. This may make a difference to rents due in March or April.

•  You do not pay income tax on rental profit in isolation from your other sources of income. Your rental profit figure will be combined with your income from other sources, before your overall liability to income tax is calculated, and will include awarding personal allow­ ances appropriate to your individual circumstances.

•  If you do not have any other source of income, you do not pay income tax unless your rental profit figure exceeds your personal allowances.

•  A loss can usually be carried forward into future tax years and used to offset a profit.

Looking at allowable expenses

There are many rules on what constitutes an allowable expense. The list below categorises some of the common expenses but it is not comprehensive, nor does it give full qualifying details. Check with your tax office or tax adviser for full particulars of the regulations governing allowable expenses.

Allowable expenses

•  rates or council tax

•  insurance premiums

•  utility service bills

•  repairs and maintenance

•  renewals

•  finance charges (unless claiming Rent-a-room relief)

•  lease renewal expenses

•  legal fees in seeking advice

•  fees in drawing up accounts

•  letting agent's fees

•  travel to and from the property for any business reason

•  stationery

•  telephone calls.

Non-allowable expenses

•  personal expenses, such as your time

•  capital costs

•  upgrading costs

•  the legal costs of setting up your lease.

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