What Taxes Do I Need To Pay As A Landlord?
In the UK, you’ll encounter several taxes related to your buy-to-let property. Here’s a quick overview of what we’ll tackle:
- Income Tax on Buy-to-Let Income
- Capital Gains Tax on Buy-to-Let Property
- Stamp Duty Land Tax (SDLT)
- Inheritance tax (IHT)
Income Tax on Buy-to-Let Income
Income tax is the tax you pay on your rental income. This includes rent, security deposits, and any other income earned from your buy-to-let property.
You can generate income in several ways with a buy-to-let property. The most common is rent, but you might also receive income from letting fees or utility bills you pay on behalf of tenants.
Generally, you don’t need to pay tax on buy-to-let income if your total income (including salary and other sources) is below the personal allowance of £12,570 (as of April 2024). This can change with new fiscal policies.
But you must still declare all rental income exceeding £1,000 to HMRC, even if it falls below the tax threshold.
If your total income exceeds £2,500, you’ll need to submit a self-assessment tax return to report your buy-to-let income.
In simple terms, you have to keep the tax office in the loop if you make a certain amount of money from renting out a property.
Income tax rates in the UK depend on your tax bracket. Here’s a quick rundown for 2023/24 tax year:
| Band | Taxable Income (2023/24) | Tax Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £150,000 | 40% |
| Additional rate | Over £150,000 | 45% |
Let’s say your total income (including your salary and buy-to-let income) is £60,000.
You’d pay 20% tax on the first £50,270 (£10,054) and 40% tax on the remaining £9,730 (£3,892).
This means your total income tax with rental income is £13,946.
Thankfully, you can reduce your income tax bill with allowable expenses. These are costs directly related to running your buy-to-let property.
Common deductible expenses include:
- Letting agent fees
- Legal fees for lets of a year or less, or for renewing a lease for less than 50 years
- Accountant’s fees
- Maintenance and repairs
- Building and contents insurance
- Council tax
- Utility bills, like gas, water and electricity
- Rent, ground rent, service charges
- Services you pay for, like cleaning or gardening
- Utilities (if you pay them)
You can also claim relief for replacing worn-out furniture and appliances, but only if you meet specific criteria set by HMRC.
Remember, the tax year runs from April 6th to April 5th of the following year. This same tax rule applies in Scotland.
Mortgage Tax Relief Option for Buy-to-Let Mortgages
Things have changed recently for buy-to-let mortgage tax relief. Previously, you could deduct your mortgage interest payments directly from your rental income, reducing your tax bill.
Now, the system uses a tax credit based on 20% of your mortgage interest. This means you get a credit worth that amount, regardless of your tax bracket.
For some, this change might mean paying more tax. Here’s why:
If your buy-to-let mortgage has you paying £5,000 in interest annually and you collect £15,000 in rent.
Under the old rules, you’d subtract the £5,000 interest from your £15,000 income, leaving £10,000 taxable. Simple and straightforward.
But, with the new system, you pay tax on the entire £15,000, then apply a £1,000 credit (20% of your interest).
If you’re in a higher tax bracket, this could lead to a heftier tax bill than before.
As a result, some investors are considering owning buy-to-let properties through limited companies.
Limited companies are separate legal entities from you. This structure allows you to claim full tax relief on mortgage interest payments for the company.
The potential tax benefits are making limited companies an increasingly popular option for buy-to-let investments. We’ll delve deeper into this shortly.
Capital Gains Tax on Buy-to-Let Property
Capital gains tax (CGT) is a separate tax from income tax on rental income. It applies to the profit you make when you sell your buy-to-let property.
Here’s a quick look at the current CGT rates for selling property:
| Tax Bracket | CGT Rate on Profit |
|---|---|
| Basic rate (Your annual total income is below £50,270) | 18% |
| Higher/additional rate taxpayer | 24% |
Profit is the difference between the sale price and the total acquisition cost. This includes:
- The original purchase price of the property.
- Any refurbishment or renovation costs.
- Selling costs like estate agent fees.
You can deduct certain costs from your CGT bill. This includes purchase price, stamp duty, estate agent fees, auctioneers, accountants, legal advisers, advertising costs, and valuation fees.
Each year, you also get a tax-free allowance (£12,350 for individuals, £24,700 for couples in 2024), which reduces the taxable profit.
Let’s walk through an example.
Let’s say you sell a buy-to-let property for £250,000, having bought it for £120,000 15 years ago.
There were also initial buying costs of £2,500 (stamp duty + solicitor fees) and selling costs of £3,000 (estate agent + solicitor fees).
Here’s how the maths work out:
| Description | Amount (£) |
|---|---|
| Sales Price | £250,000 |
| Purchase Price | (£120,000) |
| Profit | £130,000 |
| Buying Costs | (£2,500) |
| Selling Costs | (£3,000) |
| Profit before tax allowance | £124,500 |
| CGT Tax Allowance (assuming individuals) | (£12,350) |
| Taxable Gain | £112,200 |
Assuming your income puts you in the basic and higher tax brackets, here’s a simplified breakdown of the potential tax:
- Basic rate tax (18%) on £20,196 (the portion of gain taxed at basic rate)
- Higher rate tax (24%) on the remaining £26,928 (taxed at higher rate)
Plus, if the property sold was once your primary home, you might qualify for Private Residence Relief, potentially reducing CGT further.
You can offset it against any capital gains made from selling other assets in the same tax year, reducing your overall CGT bill. Any unused losses can be carried forward indefinitely and used against future capital gains.
Just make sure to claim these losses within four years.
Stamp Duty Land Tax (SDLT)
Stamp Duty Land Tax (SDLT), also known as stamp duty, is a tax you pay on buying a property. It applies to buy-to-let properties as well as residential homes.
There’s an additional 3% surcharge on top of the standard SDLT rates for buy-to-let purchases. This surcharge aims to encourage investment in primary residences.
Here’s a quick overview of SDLT rates in England and Northern Ireland (as of April 2024):
| Property Price (£) | SDLT Rate (Buy-to-Let) |
|---|---|
| £0 – £40,000* | 0% |
| £0 – £250,000 | 3% |
| £250,001 – £925,000 | 8% |
| £925,001 – £1.5m | 13% |
| Over 1.5m | 15% |
It’s important to note that Scotland and Wales have their property purchase taxes with different names and rates. Be sure to research the specific SDLT equivalent in your chosen location.
Inheritance tax (IHT)
Inheritance tax (IHT) is a tax you pay on the value of your estate when you die. This includes any buy-to-let properties you own.
The current inheritance tax threshold for individuals is £325,000, and it’s £650,000 for married couples or civil partnerships who leave everything to each other.
If your estate, with your buy-to-let properties, exceeds these thresholds, your loved ones could face a 40% tax on the excess. That’s a big chunk.
These properties can significantly bump up your estate’s value, potentially leading to a higher tax bill for your beneficiaries.
Inheritance tax planning is crucial for buy-to-let investors. Consulting a tax advisor or accountant can help you explore strategies to minimise your taxes related to buy-to-let properties.
How Do I Pay My Buy-To-Let Taxes?
To pay your buy-to-let taxes, you usually need to report your income and gains to HMRC using a self-assessment tax return each year. After that, you pay any tax owed according to their calculations.
Here’s a quick guide on the key dates for different buy-to-let taxes:
- Income Tax on Buy-to-Let Income. File your Self Assessment by October 31st (paper) or January 31st (online) following the tax year’s end in April. Pay your tax by January 31st.
- Capital Gains Tax on Buy-to-Let Property. Report the sale and pay the tax within 60 days of the property sale.
- Stamp Duty Land Tax (SDLT). Pay SDLT within 14 days of completing the property purchase.
- Inheritance Tax (IHT). The estate pays IHT within 6 months of the person’s passing.
Make sure to keep these dates in mind to stay on top of your buy-to-let taxes and avoid penalties.
Should You Form a Limited Company?
Limited companies can be an attractive option for buy-to-let investors due to potential tax advantages. But, they come with drawbacks that need careful consideration.
One key benefit is full tax relief on mortgage interest payments. Unlike owning a buy-to-let property personally, a limited company can claim the entire amount as a business expense, reducing its taxable profits.
However, limited companies often face higher mortgage interest rates compared to individual buy-to-let mortgages. This can eat into the potential tax savings.
Extracting profits from a limited company also presents complexities. Taking dividends incurs personal tax on the income you receive.
Alternatively, you can take a salary, but that means paying National Insurance contributions.
There’s another disadvantage to consider. Limited companies don’t benefit from the individual capital gains tax allowance when you sell a property. This means you might pay more tax on any profit you make.
So, should you form a limited company for your buy-to-let investments? The answer depends on your circumstances.
Factors like your tax bracket, investment goals, and plans all play a role.
Seeking professional financial advice is crucial. A financial advisor can help you understand the tax implications of both personal ownership and limited companies.
They can then guide you towards the most suitable ownership structure for your specific situation.
The Bottom Line
Buy-to-let taxes can be complex, and tax regulations can change. It’s vital to stay informed and plan effectively to maximise your investment returns.
This guide explored key tax considerations, including income tax, mortgage interest relief, capital gains tax, and inheritance tax. Remember, the best ownership structure – personal or limited company – depends on your circumstances.
While we can’t connect you with tax advisors directly, we can help you connect with experienced brokers.
They can guide you through the decision of forming a limited company and choosing the best financing options for your buy-to-let goals.
Simply fill out this form and we’ll arrange a free, no obligation consultation with a qualified mortgage broker.
