Buy-to-let taxes and legal requirements

Taxing matters

You will have to pay Income Tax on any rental income you receive. This will be charged at your highest marginal rate, either 20%, 40% or 50%. You are entitled to offset certain allowances against this though, so deduct the following from your rental income:

1. Mortgage interest
2. Mortgage arrangement fees
3. Depreciation of furniture value (10% annually)
4. Maintenance and cleaning costs
5. Ground rent, service charges (particularly for flats)and buildings insurance
6. Advertising the property to prospective tenants
7. Letting agent and accountant fees
8. Electrical appliance insurance and cover for boilers

When you sell a buy-to-let property, you will have to pay Capital Gains Tax (CGT) on the gain, or the amount the house has risen in value since you purchased it. Although you have a personal CGT allowance, you can add your allowances together if the property is held in joint names. The taxable gain will be added to your total income from other sources to ascertain your tax band.

If the property you are letting was previously your primary residence, CGT is waived if you sell within three years of it becoming a rental property.

Since 1 April 2008, working out how much CGT you are liable to pay when selling your rental property has become clearer. The amount due was previously tapered depending on how long you had owned the property, but the new system consists of a single CGT rate of 18%.

Back to top

Legal requirements

As well as complying with the taxman, there are other responsibilities you have as a landlord and these are summarised below:

1. Tenancy deposit schemes were introduced in 2007 to establish clearer agreements between tenants and landlords and to ease dispute resolution. When you receive deposits from your tenants, you should immediately place them in a Government-approved scheme. As well as preventing you from spending money that does not technically belong to you (unless subsequent tenant action dictates that you require redress) it will make any arbitration more straightforward.

2. Energy Performance Certificates have been required on all rented properties as of October 2008. This is an assessment of the heating, water, insulation, construction and energy efficiency capabilities of a property and is valid for 10 years.

3. Remember to inform your mortgage lender that you are intending to rent out the property. If you are converting your mortgage from owner occupier status, you will probably have to pay an administration fee.

4. You will also need to inform your insurance company as you may need a different policy.

5. Employ a Capita-registered technician with a Gas Safety Certificate to check your boiler, an electrician to test all appliances and make sure all furniture adheres to fire regulations.

6. You may also need a Houses in Multiple Occupation licence.

Back to top