Profits you make on your property income are taxable if they are over a certain amount. Losses can be carried over to a future year or offset against other properties in your portfolio.
Tax and the sole trader
When filling out a self-assessment tax return for HMRC, you are letting them know how much you have earned from your property business in order to pay income tax. Profit any income you receive from renting out your property/ies if that sum is between £2,500 and £9,999 after allowable expenses.
Revenue (allowable) expenses can be offset against income and include such bills as maintenance costs, letting agent fees and mortgage interest. Even fitting new windows comes under the category of ‘revenue expense’. Other expenses which qualify are:
● Furniture (under the Replacement Relief scheme);
● Your accountant’s fees;
● Legal expenses for renewing a lease;
● Insurance on building and contents;
● Costs for the running of your business such as phone calls, stamps, printing and other marketing fees;
● Courses to update your knowledge as a landlord;
● Membership to property associations;
● Petrol costs for checking the flat and collecting rent.
Capital expenses include larger, permanent building work such as adding an extension or converting a loft. These may be offset against capital gains tax when you eventually come to sell the property (provided you keep the receipts).
Mortgage relief is currently 50% (for the 2018-19 tax year), but is being phased out on a sliding scale, so that it will be a standard 20% across the board by 2020. At one point, higher rate taxpayers were able to claim 40% relief, and highest rate payers 45%, so this is substantial for higher rate payers who continue to file as a sole trader. Many have switched to registering as a limited company, where they will only have to pay corporation tax at 19% (reducing to 18% in 2020).
If you live in Scotland, the tax rates are slightly different (although it’s the same when it comes to dividends in companies, and for savings).
If your letting activity is deemed as 'running a property business', you may also be required to pay Class 2 National Insurance Tax.
You'll be considered to be running a property business if being a landlord is your primary job, you let more than one property, or you acquire properties with the intention of renting them out.
You'll need to pay this tax if your profits are over £6,205 a year. If they’re under this figure, you can make voluntary National Insurance payments which, for instance, contribute towards you being entitled to the full state pension.
National insurance contributions
If ‘property’ is your main source of employment and income, then you may be eligible to pay national insurance.
If your letting activity is deemed as 'a property business' i.e. you have more than one buy to let and your profits exceed £6,205 a year, then you may also be required to pay Class 2 National Insurance Tax.
Many sole traders choose to fill in their own self-assessment forms, others use an accountant, at minimal fees (which can be offset anyway).
Speak to Simon Shaw who specialises in investment property.
Call 0333 123 1330