Tax Case Study
We shall be exploring the tax position of a landlord we shall refer to as Mrs Mary Smith, ascertaining the tax due, and illustrating this with full workings.
Mary is a full-time employee, earning £20,000 per annum (with £2,000 PAYE deducted at source using a standard tax code). The only other income she receives is from property.
In the 2015/16 tax year, Mary had 2 properties owned solely, but sold one of her properties on 6th April 2016. This sale therefore relates to the 2016/17 tax year. She originally purchased the property for £195,000, and incurred £4,500 in purchase costs, such as solicitor's fees. After completing, she lived in the property as her main residence for 5 and a half years. Following her marriage, she decided to move into her husband's home, and began letting the property, and the property was let for 7 years before the property was sold.
During the period of ownership, £4,000 of improvements were carried out.
The property was sold on 6 April 2016 for £330,000, and Mary incurred estate agent commission and other selling costs of £5,000.
We shall first all look at how much capital gains tax Mary is likely to pay.
With reference to the above, the gross gain before reliefs is £121,500.
However, this can be reduced by PPR and Lettings Relief.
First of all, for PPR, Mary lived in the property for 66 months, and the last 18 months of her ownership can be added this, meaning 84 months out of the total ownership period of 150 months qualify for PPR relief.
Letting relief is available when:
- You sell an investment property which is, or has been, your only or main residence, and
- Part or all of the above property has at some time in your period of ownership been let as residential accommodation.
The relief which is available to reduce your capital gain, is subject to a 3 point test. The value to use is the lowest of the following:
- The amount of any chargeable gain you make because of the letting (calculated as a fraction of the gain - the fraction being the period of letting/divided by the period of ownership).
- The amount of Private Residence Relief already calculated.
Therefore, with reference to the above and the calculations, £40,000 is available for relief here.
We are then left with a chargeable gain of £13,460. The annual exemption of £11,100 may be used to reduce this, meaning there is a taxable gain of £2,360. We shall come back to this later on, when we calculate the overall tax owed for Mary.
For the other property, this continued to be let throughout the tax year. Her transactions were as follows:
|Rental income from tenants||£10,000|
|Allowable repair costs||£4,000|
|Letting agent fees||£1,200|
|Gas safety check||£80|
* Please note that mortgage interest is still allowable, as the Section 24 transition begins on periods commencing 6th April 2017, whereas this 2016/17 tax return relates to the period from 6th April 2016 to 5th April 2017.
Using the rental figures above, the profit (income less expenses) is £1,000 for the tax year.
We can now start looking at how much tax will fall due in Mary's self assessment tax return for the 2016/17 tax year, which is due for online filing by 31st January 2018.
With reference to the above, Mary's total income during the year was £21,000. This consists of £20,000 employment income, and £1,000 property profit. She is entitled to the £11,000 personal allowance, meaning her taxable income after allowances is £10,000.
At the 20% rate of tax, this means £2,000 income tax is chargeable in the 2016/17 tax year (£10,000 x 20%), of which £1,800 has already been paid via her employment income each month. This therefore leaves £200 to pay.
In addition, we explored Mary's Capital Gains Tax position earlier and determined that she made a taxable gain of £2,360. As she is a basic rate taxpayer, this gain is applied to the lower rate of CGT, i.e 18%, with therefore capital gains tax falling due of £424.80.
Therefore, Mary has £624.80 tax in total to pay. Mary does not like to make adjustments to her PAYE code where possible, and therefore needs to make this payment to HM Revenue & Customs by 31st January 2018, and file her tax return with these figures by the same date.