When it comes to letting a property, it is classed as a business asset and you are required to pay tax on the income. Brokers generally advise borrowers looking to buy to let to take out interest-only loans as opposed to repayment loans, because all interest on your buy to let mortgage can be offset against tax. How you handle the purchase of your buy to let property depends on how you perceive the investment. If you are looking for an income, it may be worth putting down a larger deposit on your mortgage in order for mortgage payments to take up a smaller part of the monthly rent.
As a buy to let landlord, you can also offset some of your costs against your tax. The standard rule is that anything that is not classed as improvements to the property can qualify for tax relief. This can include insurance, cleaning and gardening services, commission for letting agents, and various other management expenses. You cannot claim for the initial cost of furnishing a property, but when you do furnish somewhere yourself you are entitled to a wear and tear allowance of approximately 10 per cent of annual rent.
As a private landlord, it is up to you to keep accurate records of what rent you have received and when. All income from your property must be included in your self-assessment tax return. This can be recorded in Land & Property supplementary pages, available from your tax office.
In terms of tax on capital gains as opposed to income, when you come to sell a buy to let property any profits that you make are subject to Capital Gains Tax (CGT) at your highest level of income tax. There are possible ways in which to mitigate this liability. Buy to let landlords should be aware that the property will be included in their estate when they die, potentially leaving it susceptible to inheritance tax.