A major aspect of being a UK landlord is getting your head around the buy-to-let tax you need to pay, and there could be some changes in store for the sector.
Landlords and small businesses, as well as advisers, are being called to give their opinions on buy-to-let tax in a survey from the Office for Tax Simplification (OTS).
Those operating in the sector have had to deal with numerous tax changes in recent years, including income tax from rental gains, capital gains tax on the sale of a property, and mortgage interest relief changes.
The consultation aims to deduce which aspects of property income taxation are especially complicated and hard for landlords to get right. It asks for suggestions for improvements from people experiencing these taxes.
It covers both the income from renting out a property after allowable deductions on a long-term basis, as well as the furnished holiday lettings regime, which applies to eligible short-term lets. Growing numbers of landlords have turned to short-term let as a result of Covid.
Tax roundup
One of the most controversial buy-to-let tax changes has been Section 24 of the Finance Act 2015, which restricts all income tax relief on property finance costs to the basic rate of 20%. It came into full force in April 2020 and has had a major impact on some landlords.
Some landlords have chosen to set up a limited company when investing in new rental property. This means that corporation tax applies, which can be lower than the higher individual income tax rates. More buy-to-let companies were established in 2021 than in any previous year.
Buy-to-let tax applying to income received from rental property has changed, and the personal allowance is currently £12,570 at the time of this article. Landlords pay 20% tax on income between £12,571 and £50,270.
The higher rate is then £50,271, where a 40% tax applies on profits above this amount made from rental income.
In terms of capital gains tax, which applies when you sell a second home or rental property, there have been several changes in recent years. Landlords currently have 60 days to report and pay this tax when they sell a property.
Stamping out stamp duty
During the pandemic, stamp duty was temporarily axed by the government in order to stimulate the housing market. The incentive appeared successful, and was one of the drivers behind the huge property appetite seen across the country over the past two years.
Since October 2021, rates have resumed, which includes an additional 3% surcharge for anyone buying a second property or investment property. As a buy-to-let tax, this can add a large sum of money onto any purchase by a landlord.
There have been numerous calls to shake up stamp duty and remove the surcharge to entice more landlords to the market. With more households than ever living in the rental market, it is vital that there is ample stock available to tenants.
What is the OTS survey looking at?
As anyone who lets out a property in the UK must pay the correct tax, the OTS is aiming to ensure that the system is easy enough to understand and follow for everyone.
It asks questions about whether you have encountered any difficulties understanding the way taxable profits are allocated, and whether you have had trouble understanding the relief available on mortgage interest paid.
It also questions awareness of things such as the £1,000 property allowance, and asks where you go to obtain tax advice.
The survey is open until 5th June.
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