Tax basics for buy-to-letters

HMRC expect to be informed of new property investments within six months

HM Revenue & Customs have denied reports that they are planning a crackdown on property investors.

But with over 400,000 buy-to-let landlords in the UK, we have used the opportunity to take a look at the tax implications of being a landlord.

John Whiting, tax partner at PricewaterhouseCoopers says investors are effectively taxed as if they were running a business, with costs set against income.

The most important costs which can be counted to save tax are bills for repairs, letting agent fees and mortgage interest.

Profits remaining

Buy-to-letters need to remember that any element of a mortgage which repays capital must be excluded from the calculation.

Any profits remaining after these deductions is taxable, just like in a business.

The rate of tax due depends on the landlord's marginal rate of income tax, but will probably be 22 or 40%.

Losses in the current year can be carried forward to offset against profits in future years.

Tax return

Investors not used to filling out a tax return should be aware that they will need to complete one annually, even if profit and therefore tax is zero.

HM Revenue & Customs expect to be informed of a new buy-to-let property within six months.

Unlike main residential homes, investment properties are also subject to capital gains tax (CGT).

Annual allowance

CGT is charged at your income tax rate in the year the gain is made, although only on the amount above your annual CGT-free allowance, which is currently £9,200 (for the tax year starting in April 2007).

It is worth getting professional tax advice if you expect to make a big gain soon, as CGT can be complicated and various reliefs are available.

As with most tax matters, the best advice is to keep clear records of your income and expenditure as you go along, saving a headache when the tax man comes knocking.