Tax on Buy to Let properties
This article covers the basics of how the various different forms of tax may affect your rental property.
Do you pay Stamp Duty Land Tax on a Buy to Let property?
Yes, the amount varies depending on the price of the property and where in the UK it is. You can check the current rates and use our Stamp Duty calculator to see how much you’ll need to pay.
Anyone buying a second property that isn’t their main residence will be charged these new rates. This will include holiday lets and buying a property for children if the parents leave their name on the title deeds.
Stamp Duty has to be paid within 14 days of completion of the property purchase although this is usually paid by the solicitor on completion. The amount of Stamp Duty paid is deductible from any capital gains you might make you come to sell the property in the future.
Do you pay Capital Gains Tax on Buy to Let property?
Yes, if you sell the property for more than you paid for it after deducting costs such as stamp duty, estate agent and solicitors fees, this profit means you are essentially ‘gaining capital’, and so the tax applies.
However, as an individual you get an annual allowance to set any gain against.
In the 2022/2023 tax year, this allowance is £12,300. This is a special allowance purely for capital items and is separate from the annual personal income tax allowance.
If the gain is greater than the £12,300 allowance, you will pay tax at a rate of either 18% or 28% on any profit over £12,300, depending on the amount of income and capital gains you have.
Note that the lower CGT rates of 10% and 20% that were brought in with the March 2016 budget do not apply to buy to let and second properties.
What you can do to reduce your CGT liability
There are legitimate ways to reduce the amount of Capital Gains Tax (CGT) payable. If you incur:
• A loss made on the sale of a buy to let property in previous tax years
• Solicitor fees
• Estate agent fees
• Costs of advertising the property for sale
• Stamp duty
• Any expenditure on ‘capital’ items
These expenses can be deducted from your capital gain. There are also certain tax reliefs available. For example if the property was previously your main residence, the gain may be reduced.
If you do make a gain which is above your CGT allowance then you’ll need to report the gain and pay any CGT due within 60 days of the date of sale. Prior to April 2020 you would wait until the following tax year to declare a gain on residential property, but if you do this now you are likely to have to pay interest and a penalty for exceeding the 60 day deadline.
Do you pay tax on Buy to Let property income?
Yes. The income you receive as rent is taxable. You need to declare any rent you receive as part of your Self Assessment tax return. The tax on your income is then charged in accordance with your income tax banding (20% for basic rate taxpayers, 40% for higher rate, and 45% for additional rate).
However, you can minimise the tax you have to pay by deducting certain ‘allowable expenses’ from your taxable rental income.
Allowable expenses include:
• Interest on buy to let mortgages and other finance charges - be aware that since April 2020 this tax relief has been restricted to the basic rate of income tax
• Council tax, building and contents insurance, ground rents etc
• Property repairs and maintenance – however large improvements such as extensions etc will not be income tax deductible. They will be added to the cost of the property when it is sold and be deductible against any capital gain.
• Legal, management and other professional fees such as letting agency fees.
• Direct costs such as phone calls and advertising for new tenants
• Other property expenses including buildings insurance premiums
Expenses you can’t deduct include:
• Personal expenses that weren’t incurred solely for your property rental business
• The full amount of your mortgage payment, you can only offset the interest element
• Capital expenditure such as extending the property or fitting a new kitchen
Is using a limited company better for my tax position?
There is no simple answer.It depends on a number of factors such as how many properties you hold, whether you need the income quickly and how long you want to hold the properties for and your individual circumstances.
Limited companies are not limited by the mortgage interest relief restriction that came into effect from April 2020 - interest for limited companies is classed as a business expense and fully deductible against income.
Companies pay Corporation Tax at a fixed rate irrespective of the size of the profits. The Corporation Tax rate is currently at 19% for companies with profits under £50,000. This makes the tax rate very attractive compared to 40% for higher rate tax payers and 45% for additional higher rate taxpayers.
The big question is how the money in the company is passed to the individual:
• If the money is taken out of the company as a dividend, then only the first £2,000 of dividend income is tax free. Any dividends that are taken out in excess of this will either be charged at 8.75% for a basic rate taxpayer 33.75% for a higher rate taxpayer or 39.35% for an additional higher rate taxpayer. This tax is after the corporation tax at 19% has been paid.
• The money could be taken as a salary, however the company would have to operate PAYE and pay Employers National Insurance contributions on any salaries paid. This, in most circumstances, works out more expensive than paying dividends.
In addition it is worth noting:
• Companies also do not benefit from the annual allowance of £12,300 against capital gains. So extracting the money for a sold Buy to Let property could be less tax efficient than holding the property as an individual.
• As you have to pay 19% Corporation Tax on any gain, no annual allowance is given and you have to pay tax on extracting the money from the company, whereas even a higher rate taxpayer only pays 28% on any gain from the sale of a buy to let as an individual. Companies also have to prepare accounts to be filed with company’s house and prepare and file corporation tax returns which can be more onerous than Self Assessment returns.
• Interest rates charged on mortgages to companies have historically been higher than to individuals so further investigation of the comparison of the rates charged should be considered alongside the tax implications.
• Transferring a current Buy to Let property into a limited company can trigger stamp duty and capital gains tax charges at the time of transfer so advice should be sought before undertaking such a transaction. Due to the complexities of this, it is essential that you seek professional tax advice.
Do you pay inheritance tax on a Buy to Let property?
Yes, Inheritance Tax is payable on Buy to Let properties but the amount changes depending on your circumstances. A Buy to Let property that you own will form part of your estate for Inheritance Tax purposes.
It works like this:
If you’re operating as a sole landlord – with the Buy to Let mortgage in your name as an individual and your estate entirely owned by you alone – then you’re liable to Inheritance Tax if your property value less any outstanding mortgage (or combined value of your estate) exceeds £325,000.
If you’re in this with a married or civil partner, then you each have a threshold of £325,000 so the inheritance tax kicks in at £650,000.
Anything above these amounts is taxed at 40%.
Inheritance tax planning is complex and definitely something that should be discussed with an expert tax or financial adviser.
The information provided here is of a general nature. It is not a substitute for specific advice on your own circumstances. You are recommended to obtain specific professional advice from a tax and legal adviser before you take or refrain from any action.
Whilst we endeavour to use reasonable efforts to provide accurate, complete, reliable, error free and up-to-date information, we do not warrant that it is such.
The information can only provide an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice.
The information, tax rates and allowances are correct as at the 9th January 2023.