Tax on buy-to-let property and rental income | moneyfacts.co.uk

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Published: 15/03/2019

At a glance

  • There are four taxes that your investment in a BTL property will possibly incur: stamp duty, income tax, capital gains tax and inheritance tax.
  • It is possible to form a limited company for the purposes of buy-to-let, however there are several factors and regulations which much be taken into consideration. Because of this it’s best if you obtain independent financial advice on whether this is a good option for you.
  • Landlords can claim tax relief for costs incurred in replacing movable furnishings and appliances, such as televisions, white goods and kitchenware. This does not include fixtures like baths, kitchens or boilers.

For many, property has a unique physical appeal that shares and investment funds just can't match. But the Government has been clamping down on this form of investment as it looks to control the housing market. The tax position of buy-to-let investing is therefore changing.

Buy-to-let (BTL) is subject to several taxes, regardless of whether you own a single property or 100 properties.

Stamp duty on buy-to-let

Stamp duty is a tax you pay when you buy any property in the UK. It's set in tiers, depending on the price of the property. Stamp duty rates are 3% above those for residential home purchases:

Stamp Duty Rates for BTL

3%

On the first £0 - £125,000

5%

On the portion from £125,001 - £250,000

8%

On the portion from £250,001 - £925,000

13%

On the portion from £925,001 - £1,500,000

15%

Everything over £1,500,000

For example:

If you were to buy a property for £300,000, you'd pay the following stamp duty:

  • On the first £125,000 - £3,750
  • On the amount from £125,001 to £250,000 - £6,249.95
  • On the next £50,000 - £4,000

This comes to a total of £13,999.95.

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. The above rates of stamp duty are payable on any second homes as well as a buy-to-let property.

Income tax on buy-to-let

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). If you are effectively running a business as a landlord and earning over £6,240 per year in profits you will also have to pay National Insurance contributions.

However, you can minimise the tax you have to pay by deducting certain "allowable expenses" from your taxable rental income. Allowable expenses include:

  1. Rents, rates, insurance, ground rents etc.
  2. Property repairs and maintenance.
  3. Interest on buy-to-let mortgages and other finance charges (although this is reducing; see below).
  4. Legal, management and other professional fees such as a letting agency.
  5. Other property expenses including building insurance premiums.

The Summer Budget in 2015 introduced changes to the amount of tax relief that is available for interest on buy-to-let mortgages. Previously, landlords paying higher (40%) or additional (45%) rate tax could claim tax relief at their highest rate, but the Budget changes mean that tax relief will only be reclaimed at the basic rate (20%), whatever rate of tax the landlord pays.

So, if you're a landlord who only pays basic rate tax, this change won't affect you, but if you pay at 40% or 45%, you'll be losing out. The changes began to take effect in the 2017/18 tax year and were phased in over three tax years and have now been replaced by a 20% tax credit.

Landlords can also claim tax relief for costs incurred in replacing movable furnishings but not fixtures.

If you're unsure, an accountant can help you make the most of your allowable deductions so that you don't pay more tax than you must.

One peculiar thing about rental income is that it doesn't qualify as income for pension purposes. So if all your income is from renting property, you would not benefit from tax relief on your pension contributions as you can with most income. Income from a furnished holiday let, however, does qualify.

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

Capital gains tax on buy-to-let

You do need to pay capital gains on your buy-to-let property, but only if you've made a profit. Capital gains tax is payable when you sell a buy-to-let property at a profit compared to 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.

If you've sold a buy-to-let property, you'll need to declare this on your 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). Again, a furnished holiday let may attract a lower 10% rate of CGT due to 'Entrepreneurs Relief', which applies to selling certain businesses.

If you've made a loss on a 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 can deduct some expenses you've incurred in buying, selling or improving the property, such as:

  1. Solicitors’ fees.
  2. Estate agent fees.
  3. Costs involved in advertising the property for sale.
  4. Costs incurred in increasing the property's value (improvements, but not maintenance or general upkeep costs).
  5. Stamp duty.

Inheritance tax on buy-to-let

You may need to pay inheritance tax on buy-to-let properties. 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 (other than on estates passing to the spouse or civil partner, which are free of inheritance tax).

Your buy-to-let properties (or property) form part of your estate for inheritance tax purposes.

You may qualify for Business Relief if your buy-to-let portfolio was run as a business. This will depend on several factors.

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

Can I form a limited company and pay less tax on my buy-to-let property?

Yes, but there are a lot of factors involved in this decision.

Limited companies are exempt from the mortgage relief restriction that came into force in April 2017. This is because any interest made from a business property is classified as a business expense and is therefore fully deductible against income.

Company owners will know that you must pay corporation tax at a fixed rate regardless of the size of your profits. This rate is currently 19%. Compare this to the 20%, 40% or 45% that unincorporated buy-to-let landlords must pay on their property earnings, and it is an attractive proposition.

It's not quite that simple though. Be aware that you as an individual may need to pay tax to get access to the money earned by your limited company. For example, if you access your earnings as a dividend, only the first £2,000 of that is tax-free. Any dividends in excess of £2,000 will be charged at either 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers or 38.1% for additional rate tax payers. And this is after the corporation tax at 19%.

You could choose to take the earnings as a salary. If you do, be aware that your limited company would have to operate PAYE and include National Insurance contributions on any salary paid. In most cases, this will work out as more expensive than taking the money as dividends.

Always seek advice from a specialist before considering forming a buy-to-let limited company. Our preferred mortgage advisers can help guide you through this process.

Moneyfacts tip

Moneyfacts tip Leanne Macardle

Taxation on buy-to-let properties can be a complex subject with the possibility of changes in legislation ever present. It is highly recommended that you always seek advice from a specialist or qualified adviser to avoid any nasty surprises.

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.

At a glance

  • There are four taxes that your investment in a BTL property will possibly incur: stamp duty, income tax, capital gains tax and inheritance tax.
  • It is possible to form a limited company for the purposes of buy-to-let, however there are several factors and regulations which much be taken into consideration. Because of this it’s best if you obtain independent financial advice on whether this is a good option for you.
  • Landlords can claim tax relief for costs incurred in replacing movable furnishings and appliances, such as televisions, white goods and kitchenware. This does not include fixtures like baths, kitchens or boilers.

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