Spire Accountants

Landlords are any legal entity, be it an individual or a company, who have purchased property for the purpose of renting it out in order to generate an income. In some cases, the property itself is on lease to the landlord and they have decided to sublet it out.

This guide is aimed at individuals who are landlords as opposed to companies however the majority of the guidance applies regardless of whether the property is held by an individual or a company.

Buying, maintaining and selling buy-to-let properties can be an expensive business, so it is important to understand all the costs you will face before deciding whether to become a landlord. 

Buy-to-let mortgage costs

 If you will need a buy-to-let mortgage, your monthly repayments are likely to be your biggest regular outgoing. You should consider if you could afford it if the property was empty for a period of time.

Property maintenance & refurbishment costs

A rental property will require maintenance from time to time so be prepared for these costs as they tend to occur sporadically.

The property may require refurbishment every few years especially after the end of a long lease agreement which is not renewed by the tenants.

Letting agent fees

If you decide to let someone else manage the property on your behalf, then be prepared to pay letting fees.  Have a look around to find out what letting agents in the area you are looking to invest are charging customers.

Landlord insurance

 It's a good idea to take out landlord insurance and, if you have a mortgage, your lender will usually expect you to do so. 

 You can get different levels of insurance – for instance, cover for the building and cover for your contents if the property is furnished. 

Tax on buy-to-let properties

The profit generated by a rental property will be subject to income tax. 

Buy-to-let stamp duty

The buy-to-let stamp duty surcharge is a major consideration when buying an investment property.  The extra charge potentially adds thousands to the cost of a buy-to-let property. The current stamp duty rates on buy to let properties are shown below:

Please note that in order for a business expense to be deductible for tax purposes, it must meet the wholly and exclusively test which is that the expense has been wholly and exclusively incurred for the purposes of the trade. 

The purpose of this test or caveat is to stop people abusing the tax system by claiming personal expenses when arriving at income subject to tax. 

If some expenses have an element of personal and business purpose, the amount deductible is the proportion relating to the business purpose.

There are 2 other main classes of expense which are not deductible for income tax purposes:

1. Capital assets - these are expenses which would increase the value of your property such as an extension, a structural improvement to the building (new roof or re plastering the house) or a new high specification kitchen or bathroom.  You should hold onto the receipts relating to this work and claim it as a deduction when the property is sold and capital gain subject to tax on the property is calculated.

2. Mortgage interest - this has been a relief which used to be available up until a few years ago and its removal has had an adverse effect on landlords in the form of higher income tax bills. Relief now is only provided on the interest paid on a mortgage at the base rate which is currently 20%.

With regards to point 2 above, it is worth noting that if rental properties are held in a company, interest on any loans taken out will be fully deductible under corporation tax.