Buy to Let Tax Guide

Dealing with tax and keeping financial records for a buy to let business is as much a part of life as a landlord as managing investment property and tenants. Failing to tell the taxman about rental income or any profit from selling a home can end up as an expensive mistake.

A property business is not just renting out a home or commercial property, the tax rules also cover taking in lodgers, holiday lets and letting permanently sited caravans and houseboats.

Telling the taxman about any rental income is the first step. The date of first letting is the key as this is the day the first tenancy agreement starts. The tenant does not have to move in; rather it’s the day he or she contracts to start paying rent.

Landlords who do not file a self-assessment tax return should call or write to the tax office by October 5 of the year following the first letting date. So, for a landlord letting out a property from September 1, 2011, the tax office should be informed by October 5, 2012. The first letting date also sets the dates for the first tax year: in this case our landlord’s tax year runs from September 1, 2011, until April 5, 2012. Subsequent years start on April 6 and end on the following April 5.

Next comes keeping financial records. Keep every piece of paper relating to a property’s finances: rent receipts, bank statements, mortgage statements and copies of bills. Allocate them to financial years.

Landlords pay two property taxes:

Income tax on rental profits: Rental profits are calculated by adding up any income from tenants and deducting any money spent on the property. Expenses would cover mortgage interest, repairs, insurance, service charges, ground rent, accountancy and letting agent costs. Other claims might include home as office costs, phone bills and travel to and from a rental property.

Capital gains tax on profits made selling a property: Capital gains tax deals with any profits made from an increase in property values, less buying, selling and improvement costs. These costs include legal fees, estate agents and stamp duty plus any additions to the property, like a loft extension, conservatory or garage that add value.

The taxes are paid by the owners according to the share they hold of a property, so a husband and wife generally own a property 50:50 and split the profits or losses half each.

Tax returns need to be lodged with HM Revenue & Customs by January 31 of the year following the end of the tax year; so for a first letting date of September 1, the tax return must be in by January 31, 2013.