Even when targeted by the taxman, buy-to-let does pay


As The Scotsman revealed last week, the taxman is about to "target" the buy-to-let market. But this should not have honest landlords shaking in their shoes.

Holders of investments, other than property, might say, with some justification, that Her Majesty's Revenue & Customs (HMRC) is rather benign when it comes to the buy-to-let sector. Indeed, when the various tranches of tax relief available are aggregated, many landlords who have a mortgage will pay little or no tax on their investments, until it is time to sell up when any surplus will, of course, be subject to capital gains tax (CGT).

The rules on rental income are really quite simple:

Firstly, an owner of an investment property has to declare all rental income from that property during the current tax year.

However, there are a number of allowable expenses, which can be set against rental income for taxation purposes. These are:

* All payments of interest on the main mortgage taken out on the property (but not payments of capital).
* Costs incurred in maintaining the property.
* Fees to managing/letting agents.
* 10 per cent of the rental income for any tax year, which can be deducted to cover depreciation of furniture, furnishings etc.
* Any professional advisory costs (solicitors' or surveyors' fees, advertising expenses, etc).
* If a landlord's allowable outgoings exceed income, he or she will not be liable to any tax on the rent.
* If income exceeds outgoings then that surplus will be liable to tax at either 40 per cent or 22 per cent (at current rates). Basic rate taxpayers should be aware that income from a buy-to-let investment may take them into the 40 per cent tax bracket, with all or part of the profit charged at 40 per cent

Anyone new to buy-to-let is required to inform HMRC by 6 October in the year following the tax year when he or she starts.

David Alexander is proprietor of DJ Alexander, an Edinburgh- and Glasgow-based residential letting agency.

_The Scotsman, 1 March, 2008_