Buy-to-let tax changes in 2022: everything you need to know
Keeping up with buy-to-let tax changes can be complicated - but as a property investor, understanding how best to approach tax could help you to increase your return on investment.
In recent years, the government has introduced new tax rules specifically aimed at buy-to-let landlords. It’s therefore important to know what you can expect to pay, and whether you’re entitled to things like mortgage interest tax relief.
In this article, we’re going to focus on everything you need to know about tax credit as a property investor, including how the latest buy-to-let tax changes could affect mortgage interest payments.
How can I reduce the tax on my buy to let property?
There are several ways landlords can reduce tax on buy-to-let properties. Some of the most popular strategies include:
Moving your property portfolio to a company
Moving your property to a company structure can be more tax-efficient than personal ownership. This involves essentially selling your property to a company in which you have a controlling interest as a director. There are capital gains and income tax benefits to doing so, although there are still some obstacles to navigate.
For example, property must be sold to your company at market rate, which involves an independent valuation for stamp duty land tax purposes. If a property is remortgaged, this will also require the consent of the lender. However, in the long-term, the dividends can prove beneficial.
Changing the split of ownership
Married couples and civil partners can amend the split of ownership on buy-to-let properties to enjoy tax benefits. As standard, HMRC splits rental income on the properties of married couples and civil partners on a 50/50 basis.
However, if one partner is in a lower tax bracket or is not making the most of their full personal tax allowance (as a stay-at-home parent for example), it could be a good idea to transfer a property entirely into this partner’s name in order to pay less tax.
What are the buy to let tax changes?
Tax rules are constantly changing, and it’s easy to miss some of the amendments to legislation. What follows are changes that landlords should be aware of in 2022:
Buy-to-let income tax rates
Everybody has an income tax personal allowance. This is the amount you are allowed to earn before you are expected to pay income tax. In 2022, this is set at £12,570, which represents an increase of £70 in comparison to 2021.
In 2022, landlords must pay 20% tax on buy-to-let income between £12,571 - £50,270. A higher-rate threshold of 40% applies to landlords with a rental income of £50,271 or over. The additional rate of 45% remains unchanged on income of £150,000 or more.
Extension on capital gains tax for property investors
Landlords now have 60 days to report/pay capital gains tax after the sale of a property. This has doubled from 30 days but remains significantly lower than the 22-month period which was in place prior to April 2020.
Digital tax for VAT-registered landlords
Property portfolio holders who own a VAT-registered business with a VAT threshold below £85,000 will be required to keep digital records and use accounting software to file tax returns. Digital tax returns will be required for all self-assessment taxpayers from April 2024.
How do I avoid capital gains tax on a buy to let property UK?
While it is impossible to fully avoid capital gains tax on buy-to-let properties in the UK, there are several ways you can help reduce your CGT expenditure. Some of the most popular strategies include:
- Deducting the cost of improvement works that enhance the overall value of your asset (standard maintenance costs are not applicable here).
- Set up a limited company (CGT only applies to the sale of a home owned by an individual).
- Check whether you are entitled to Private Residence Relief (this only applies if you have lived in your buy-to-let property for a defined period).
Is mortgage interest tax deductible in 2022?
Prior to 2017, it was possible for buy-to-let landlords to deduct costs such as mortgage interest from rental income. HMRC began phasing out finance costs that could be deducted over a four-year period, while simultaneously introducing a new relief known as tax credit.
Tax credit came into full effect in April 2020. This means that mortgage interest is no longer deductible in 2022. Instead, landlords now receive a 20% tax relief on mortgage interest as standard.
Can I deduct mortgage from rental income?
As a landlord, property income allowance means you can earn up to £1,000 in rental income completely tax-free. If your rental income is £1,000 or less, you won’t have to declare or pay tax on this income. However, you cannot deduct mortgage costs from your rental income.
What can I claim as a landlord?
Landlords can offset certain allowable expenses against pre-tax profits. Allowable expenses cover funds that have been spent exclusively for the purposes of renting out a property. This broadly covers any expenditure in relation to the maintenance and upkeep of a property. Some examples of landlord’s allowable expenses include:
- Water rates, utility bills and council tax (if you cover them as a landlord).
- Insurance costs (landlord’s building insurance and contents insurance).
- Service costs (cleaners, gardeners and ground rent).
- Some property management/letting agent fees.
- General maintenance/refurbishment costs.
Is the mortgage interest 100% tax deductible?
Mortgage interest is no longer 100% tax deductible in 2022. While landlords still receive relief on mortgage interest payments, it is at a reduced rate in comparison to figures prior to April 2017. Relief on mortgage interest payments starts at 20%.
Use PropertyData to keep up to date with the latest property tax changes
Tax laws for buy-to-let property owners change regularly, and as a property portfolio holder, it is your responsibility to ensure that you’re compliant with all current legislation. With access to PropertyData’s tools and information, you can ensure that you’re up to date with all current tax regulations.
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