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A guide to Buy-to-Let property tax

There are many different types of tax that landlords and buy to let investors could potentially pay in addition to income tax on the rental returns. This helpful guide outlines the most common types of tax that buy to let investors face.

Stamp Duty tax on buy to let properties

Stamp Duty tax is payable on buy to let properties, with the amount of tax dependant on the price of the property. If the stamp duty isn’t to be paid by the solicitor on completion of the purchase of a property, then the tax would need to be paid within 30 days of completing the purchase of a property.

The rates for stamp duty on buy to let properties are as follows:

  • 3% tax on the first £125,000
  • 5% on the portion up to £250,000
  • 8% on the portion up to £925,000
  • 13% on the portion up to £1.5 million
  • 15% on everything over £1.5 million

Paying inheritance tax on buy to let properties

Although the amount is dependent upon the individual circumstances, inheritance tax is payable on buy to let properties. If the landlord operates on their own as the outright landlord and owner, they will be liable to pay inheritance tax if the property, minus any outstanding mortgage, exceeds £325,000. If an individual and their married or civil partner operate as part of a joint partnership, then they will each have a £325,000 threshold, therefore they would have to pay inheritance tax when property value exceeds £650,000. Anything above the thresholds previously mentioned will be taxed at 40%.

Capital Gains tax on buy to let properties

If a buy to let property is sold for more than it is bought for, after reducing stamp duty and other fees, then Capital Gains tax would be applied to the amount. However, each individual has an allowance to set against any gain. Therefore, if you gain more than the allowance set out for the particular tax year, Capital Gains tax will be applied at either 18% or 28%, dependant on the income and capital gains that the individual has.

In order to reduce the amount of Capital Gains tax that you pay, there are a number of things that can be deducted from the capital gain:

  • Estate agent and solicitor fees
  • Stamp duty
  • Advertisement costs for the sale of the property
  • Expenditure on capital items
  • Any losses made on buy to let properties in previous years

Any gains are to be declared on self assessment tax returns, making the tax payable by the 31st January in the year after the tax year in which the property was sold. However, as of April 2019, the tax payable based on the profit of the sale of the property will need to be paid within 30 days of the sale of the property.

Paying tax on buy to let property income

The income that is received through monthly rental payments is taxable, with any rent that is received being declared on your self assessment tax return. The tax on this income will then be charged alongside your income tax banding.

If you deduct some specific ‘allowable expenses’ from the taxable rental income, you will be able to minimise the overall tax that you need to pay. The allowable expenses that can be deducted include:

  • Insurance, council tax, ground rents etc
  • Professional fees related to the property
  • Property maintenance and repairs
  • Finance charges
  • Property expenses, such as buildings insurance premiums
  • Buy to let mortgage interest

The budget set in summer 2015 has meant that the amount of tax relief available for interest on buy to let mortgages has been reduced as of April 2017. Previous to the changes introduced in April 2017, tax was payable on net rental income after deducting the allowable expenses, including the mortgage interest.

Therefore, this meant that landlords that were paying higher or additional rate tax could claim tax relief at their highest rate. The changes mean that as of April 2020, regardless of what rate of tax the landlord pays, tax relief can only be reclaimed at the basic rate of 20%.

Is using a limited company better for tax?

The new restrictions regarding mortgage interest relief, introduced in April 2017, do not affect limited companies. The interest for limited companies can be classed as a business expense, meaning that they are fully deductable against the income to the business. These companies do pay a fixed rate of corporation tax, regardless of how much profit is made. This rate is currently fixed at 20%, but is set to be reduced to 17% in 2020, providing a much more appealing tax rate when compared to higher rate and additional higher rate taxpayers, of who pay 40% and 45% respectively.

Using a limited company to reduce the amount of tax depends on your individual circumstances; including a number of things, such as how many properties are under your ownership, how quickly you need the income and also how long you aim to hold the properties for.

The difficult aspect of this would be how the money is passed to the individual from the company. If the money is taken as a dividend, only the first £5000 of it would be tax free. If the money exceeds this amount, it will be taxed at 7.5% for basic rate payers, 32.5% for higher rate taxpayers or 38.1% for additional higher rate taxpayers. These tax rates are also after the initial corporation tax has been paid at 20%.

Another option would be to take the money as a salary, but this would mean that the company would have to pay an Employers National insurance contribution, as with all salaries, meaning that it could work out more expensive than the money being taken as a dividend. Furthermore, a business does not have the luxury of an annual allowance of £11,100 against capital gains, and so extracting the money could be less efficient in relation to tax, as opposed to holding the property as an individual.

Interest rates would also need to be considered as rates are typically higher on mortgages for companies when compared to individuals, and transferring buy to let properties into a limited company could potentially trigger stamp duty and capital gains tax charges.

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