So we know, getting that rental income sounds great. As a landlord though, you sometimes don’t have the foggiest idea of the amount it can cost you in tax.
Taxes and Mortgages sound great up front. But wait!
They have a lot of hidden traps that you will only see once you have fallen into one. However, that should not put you off entirely!
Simply get some knowledge on the subject and get all the cash and none of the stress. Here is all you need to know about buy-to-let mortgages and their tax implications. Let’s get to it!
Rental Income Tax
Do you know that you need to pay tax on rental income?
Okay – you may already know – but do you know how much tax you have to pay?
Your tax depends on how much you make from the property (including rent) and what tax bracket you belong to.
If you have a property and rent it to somebody, it makes you a higher earner, and you need to pay higher taxes to the government.
Okay, so let’s say you make an income of £15000 when renting out a small two-bedroom flat. You can add it to your annual earnings, which might push you into a higher tax band.
Mortgage Interest Tax Relief Changes
Before now, you could deduct the interest on your home loan from your earnings. However, you can’t do that any longer – the tax relief is only on what you get now.
Let me give an example. If your yearly mortgage interest is £10,000, you can’t remove it from earnings or income like before. What you get is £2,000 in the form of a tax credit.
That means that, as a landlord, you can expect a 20% tax credit on installments for home loan interest.
Good Records
You need to pay an accurate amount of tax if you are renting out your property or earning income with rental. This is because you will get money back on each and every legal expense you make.
That includes expenses on property-related repairs, content insurance, letting agent fees, and management fees.
You get payment for every expense as long as you have an original receipt. So kee your stuff up to date!
Capital Gains Tax
You need to pay capital gains tax if you sell your property. The capital gains tax rate for residential property is 18 to 28 percent – that totally depends on the total amount of the earnings from the sale.
Everyone has their allowance in the capital gains tax as part of the annual tax allowance. You can then pay the full tax amount on that profit so you don’t owe the government.
Tax-Efficient Ownership Structures
Some landlords choose a Limited Company when buying a buy-to-let. You get some tax benefits, really, after the mortgage interest relief changes.
Corporate tax rates are lower than personal tax, and you can consider mortgage interest a business cost.
Still, you do have costs and overhead to setting up and running a Ltd company, but it could save you a lot. Do your math, and speak to your buy-to-let mortgage advisor.
You need an expert tax advisor to help save you a lot. Your investment-savvy accountants will help you and give you tailored service, helping you become and stay tax-efficient
Conclusion
So, there you have it! No more hidden tax implications that will catch you by surprise. The above information will have you armed to the teeth with knowledge.
And with the right kind of buy-to-let mortgage advisor you would be amazed at what you can save!
