Buy to Let properties has always been a popular investment. In the current cost-of-living crisis that we are all facing, it’s important to understand 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?
The simple answer is yes! The exact sum varies based on the property’s cost and its location within the UK. You’ll be able to find the current rates online, and some websites have a calculator available to see how much you’ll need to pay.
Anyone buying a second property that isn’t their main residence will be charged the current rates. This includes holiday lets and buying a property for children if the parents’ names remain on the title deeds.
Stamp Duty must be settled within 14 days following completion of the property purchase, however, this is usually paid by the solicitor on completion. The amount of Stamp Duty paid is deductible from any capital gains you might make if 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 offset any gains. In the 2023/2024 tax year, this allowance is £6000. This is an allowance purely for capital items and is separate from the annual personal income tax allowance. The capital gains tax allowance for the 2023/24 tax year has decreased by more than 50% from its 2022/23 threshold of £12,300 to £6,000.
If the gain is greater than the £6000 allowance, you will pay tax at a rate of either 18% or 28% on any profit over £6000. The specific rate depends on your combined income and capital gains.
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.
Should your gain exceed your CGT allowance, it becomes necessary to both report the gain and settle any applicable CGT within 60 days from the sale date. Before April 2020, you’d wait to declare a gain on residential property until the following tax year. However, this approach now is likely to result in interest charges and penalties due to surpassing the 60-day timeframe.
Do you pay tax on Buy to Let property income?
Another yes. The income you receive as rent is taxable and you need to declare any rent you receive as part of a 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, it is possible to 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. Instead, 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
- 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, but it is worth exploring as it depends on a number of factors so it is worth seeking expert advice.
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, and 25% for companies with profits over £250,000. This can make the tax rate very attractive compared to 40% for higher rate tax payers and 45% for additional higher rate taxpayers.
The 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% (profits under £50,000) 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 can often work out more expensive than paying dividends.
It is also worth noting:
- Companies do not benefit from the annual allowance of £6000 against capital gains so extracting the money from a limited company 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 time consuming and complicated than Self-Assessment returns.
- Historically, interest rates charged on mortgages to companies have been higher than to individuals so further investigation 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.
Do you pay inheritance tax on a Buy to Let property?
Yes, Inheritance Tax is payable on Buy to Let properties but the amount will change depending on your circumstances. Any Buy to Let properties 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.
Everyone’s circumstances are different, so the information above should be used as a guide. If you want to speak to someone and explore the different avenues and what is right for you, then get in touch.