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Tax on buy-to-let property and income

Tax on buy-to-let property and income

Category: Buy To Let

Buy-to-let is an increasingly attractive investment in the UK and for many, bricks and mortar has a unique physical appeal that shares and investment funds just can't match.

But Buy-to-Let investing is subject to several taxes, whether you own a single property or 100.

There are four taxes that your investment in a Buy to Let property will possibly incur:

Stamp Duty

Income Tax

Capital Gains Tax

Inheritance Tax

Stamp Duty on buy-to-let

Stamp duty is a tax you pay when you buy a property in the UK. It's set in tiers depending on the price of the property and is payable on the full purchase price.

Stamp Duty Rates

£0 - £125,000

0%

£125,001 - £250,000

1%

£250,001 - £500,000

3%

£500,001 - £1,000,000

4%

£1,000,001 - £2,000,000

5%

Over £2,000,000

7%

For example:
If you bought a property for £124,999 you'd pay no stamp duty. But if you bought a property for £125,001 you'd pay £1,250.01.

Stamp duty rates are no different if you are buying your own home, or a BTL property.

"Stamp duty is a one-off tax. That means that if you decide to rent out your home (because you can't sell it or you're moving in with a partner), you wouldn't have to pay it again as a buy-to-let landlord on the same property."

Income tax on buy-to-let

The income you receive as rent is taxable. You need to declare 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 mortgage payments (it's only the interest, not any capital you repay that's tax deductable)
  • Maintenance costs (repairs and upkeep, but not property improvements such as building an extension)
  • Letting agency fees
  • Buildings and contents insurance premiums
  • Council Tax (where it is you, and not the tenant, who pays it)
  • Utility bills (again, where it is you who pays the bill!)

If you're in any way unsure, an accountant can help you make the most of your allowable deductions so that you don't pay more tax than you have to. And don't worry – accountant's fees are tax deductable too!

HM Revenue and Customs require you to keep a record of your income and expenses as a buy-to-let landlord for at least 6 years.


Capital gains tax on buy-to-let

Capital gains tax is payable when you sell a buy-to-let property at a profit from when you bought it. It isn't payable if you make a loss.

You get an annual tax-free allowance of capital gains that you can make each tax year, before capital gains tax is charged. This allowance for tax year 2014/15 is £11,000.

If you have sold a buy-to-let property, you'll need to declare this on your Self Assessment tax return. Capital Gains Tax is charged at 18% or 28% of the profit (depending on the taxable income and total capital gains you've made over the year).

If you have made a loss in buy-to-let property sold in a previous year, you may be able to use this loss to reduce your capital gains bill. Similarly, you are able to deduct some expenses you've incurred in buying, selling or improving the property:

  • Solicitor's fees
  • Estate agent's fees
  • Costs involved in advertising the property for sale
  • Costs incurred in increasing the property's value (improvements, but not maintenance or general upkeep costs)
  • Stamp duty

Inheritance tax on buy-to-let

Not nice to think about, but very important to plan for, is inheritance tax. Your buy-to-let properties (or property) form part of your estate for inheritance tax purposes.

If an individual's estate exceeds £325,000 (or up to £650,000 for married couples or civil partners), inheritance tax is charged at 40% on everything above this threshold.

"A good accountant may be able to help you reduce your exposure to inheritance tax."


Guide Updated: 01/04/14

What next?

Compare the best buy-to-let mortgages

Speak to a specialist buy-to-let mortgage adviser

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

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