Property Tax: How it affects you
Find out about all the various buy-to-let property tax requirements.
There are three stages at which three different taxes affect individuals in the property market. Firstly, when you buy a property. Then, if the property is let out, landlords must pay Income Tax on their property income; and finally, when a property is sold the seller must pay Capital Gains Tax on any gain arising.
Tax issues when buying your property
Land and Buildings Transaction Tax (LBTT) has applied to property transactions in Scotland since April 2015 when it replaced Stamp Duty Land Tax. It is the buyer’s responsibility to ensure that an LBTT return is completed accurately and submitted to Revenue Scotland and to ensure that payment is made by the due date however in practical terms it is usually the solicitor who is acting on the buyer’s behalf who will complete the return and facilitate the payment.
The amount of LBTT payable depends on the price of the property that has been purchased. The table below shows the rate of LBTT payable on the amount of the price that falls within each band:
- Purchase Price £0 to £145,000 - LBTT rate 0%
- Purchase Price £145,001 to £250,000 - LBTT rate 2%
- Purchase Price £250,001 to £325,000 - LBTT rate 5%
- Purchase Price £325,001 to £750,000 - LBTT rate 10%
- Purchase Price £750,001 and over - LBTT rate 12%
An example of how this works would be if the house price was £275,000, the first £145,000 would be charged at 0%, the next £105,000 would be charged at 2% and the remaining £25,000 would be charged at 5% resulting in LBTT payable of £3,350.
Additional Dwelling Supplement Tax (ADS)
From April 2016 the government is introducing a supplement to the usual LBTT rate when the buyer is purchasing an ‘additional residential property’. This supplement will be applicable in every case where at the end of the day of the property purchase, the buyer owns more than one residential property.
There are special rules where the buyer purchases a new home before selling their current home. If the current home is sold within 18 months of purchasing the replacement they can apply to get a refund of the supplemental LBTT paid.
ADS is a supplement on purchases of additional residential properties in Scotland (such as buy-to-let properties and second homes) of £40,000 or more.
The ADS rate was changed by the Scottish Parliament on 25 January 2019 from 3% to 4%. The contract date and the effective date of your transaction will determine whether the changes affect you.
ADS rates for transactions on or after 25 January 2019
ADS is 4% of the ‘relevant consideration’ (usually the purchase price)
ADS rates for transactions prior to 25 January 2019
ADS is 3% of the ‘relevant consideration’ (usually the purchase price)
The Additional Dwelling Supplement is 4% of the total purchase price of an additional residential property purchase of £40,000 or more.
Below shows examples of total tax payable;
Purchase price LBTT ADS Total tax payable
£135,000 £0 £5,400 £5,400
£150,000 £100 £6,000 £6,100
£200,000 £1,100 £8,000 £9,100
£250,000 £2,100 £10,000 £12,100
£300,000 £4,600 £12,000 £16,600
As soon as you start renting out your property you must tell HM Revenue and Customs (HMRC). If your NET rental income in the tax year is more than £2,500 (after allowable expenditure) and you don’t already complete a tax return, then you need to register for self-assessment. If your NET rental income in the tax year is less than £2,500 you should contact HMRC directly as you will still need to pay tax on your income however you are not required to complete a full self-assessment tax return.
To calculate your taxable property income in the tax year you take all your rental income for the year and deduct all your allowable expenses for the year. The net amount is the profit for the year which is taxable.
Allowable expenses include interest on a mortgage that was used to buy the property (not the capital repayments); buildings and contents insurance costs; letting agents’ fees; utility and council tax bills paid for by you; accountancy fees and advertising costs.
If your property is let fully furnished you are currently able to claim a deduction for the wear and tear of items in your property. This allowance is calculated as 10% of your rental income less any expenses met by you which would usually be met by a tenant such as council tax.
Changes to Income Tax Rules
From April 2016, the wear and tear allowance will be replaced by a new system allowing residential landlords to deduct the actual cost of items that are replaced, rather than wear and tear on existing items.
In a gradual process which is being introduced from April 2017, finance costs will be restricted to the basic rate of Income tax (currently 20%). This includes things like mortgage interest, interest on loans and fees for taking out or repaying mortgages or loans. Instead of being able to deduct these costs from your profits, you will receive a basic rate reduction in your Income Tax liability. Tax relief is currently available at 40% and 45% for wealthier landlords.
The changes will come into effect the following stages:
- 2017/18 – 75% of finance costs fully deductible with 25% of costs qualifying for 20% relief
- 2018/19 – 50% of finance costs fully deductible with 50% of costs qualifying for 20% relief
- 2019/20 – 25% of finance costs fully deductible with 75% of costs qualifying for 20% relief
- 2020/21 – all financing costs will be given as basic rate tax relief
Completing your tax return
Our top tip is to complete your Self-Assessment form online as this means you get an extra three months to submit it!
The deadline for submission of paper tax returns is 31 October following the end of the tax year whilst the deadline for submission of online tax returns is 31 January following the end of the tax year.
No matter which type of return you complete, the deadline for paying any tax you owe is 31 January following the end of the tax year.
The Gov.uk website has more details about the deadlines for completing your return as well as advice on how to calculate allowable expenses and how to fill in the specific boxes.
It can also be really useful to speak with your letting agent or accountant about the tax rules surrounding rental properties. There have been a lot of changes recently so it is important to try to keep on top of all the latest developments.
When you sell your property you must pay Capital Gains Tax (CGT) on any gain that has arisen since you bought it. The gain is calculated as amount you receive for the property less the amount you paid for it and any amounts you have spent enhancing the value of the property such as an extension or new bathroom.
Any Stamp Duty Land Tax or LBTT that you paid when you bought the property can be deducted as a cost of purchase as well as any legal fees that you incurred to buy and sell the property.
Where the property has been your home during the time you owned it you will be eligible to claim principal private residence relief which means that part, if not all, of the gain is exempt from CGT. There are complex rules surrounding this relief so we would suggest that you consult your tax advisor when you sell your property to see if you are eligible.
The gain on property will be taxed at 18% or 28% depending on the level of your other income in the tax year.
Reporting and paying CGT
You must report any capital gain in your self-assessment tax return for the tax year in which you sold the property and the actual tax is payable on 31 January following the end of the tax year.
If you would like to find out more, please get in touch with one of the ESPC Lettings team on 0131 253 2847 or email email@example.com.