The 5 most FAQ’s about Tax on a Buy to Let Property

Unsurprisingly, when tackling the topic of tax, everybody wants to know how to either pay less of it or avoid more of it.

It’s no different when dealing with property tax. The property market is lucrative, therefore taxes are impending at almost every stage of the purchasing or moving home process.

A lot of the time, we take taxes for granted. However, if you’re looking at a buy to let mortgage, or property, it’s handy to know where and when you can expect to pay taxes and how you can also save some money along the way.

Here are 5 frequently asked questions about tax on a Buy to Let property:

#1. Do you pay tax on buy to let property income?

Of course you do. It’s an income, so it’s taxable. Any rent you recoup from your properties needs to be declared when completing your Self Assessment tax return. The amount of tax you will pay will depend on the amount you earn and which tax bracket you land. The basic ‘taxpayers rate’ is 20%, followed by 40% for ‘higher rate’ and 45% for ‘additional rate’ tax.

The untrained amongst us, when completing a Self Assessment tax return, may not be aware that the amount can be reduced by deducting ‘allowable expenses’.

What are allowable expenses?

Allowable expenses are costs that you incur from being a landlord which can then be deducted from your overall tax bill. What you’re looking for are things like:

  • Council tax
  • Insurances
  • General repairs and maintenance
  • Legal and professional fees

In April 2017, new tax laws for landlords were introduced, so it’s worth brushing up on the latest legislations and the proposed actions which will be rolled out over the next four years.

#2. Do you pay Stamp Duty tax on a buy to let property?

Unlike the new law which sees first time buyers benefiting from Stamp Duty relief on any residential property up to the value of £500,000, Stamp Duty is still payable on a buy to let property. The amount you will pay depends entirely on the price of the property.

Typical rates of Stamp Duty tax can be applied like this:

  • 3% on the first £125,000
  • 5% up to £250,000
  • 8% up to £925,000
  • 13% up to £1.5 million
  • 15% on anything over and above

If this is a second property (which isn’t your main residence), you can expect to pay somewhere in line with these rates. Although the amount of Stamp Duty paid is deductible from any capital gains you may make once the property is sold.

#3. Do you pay Capital Gains Tax on a buy to let property?

In short, yes. The reason being that if you sell the property for more than you paid for it, after deducting costs such as stamp duty and legal fees, you are making a profit (gaining capital) – therefore the tax is applied. Despite this, as an individual, you can be entitled to an annual allowance purely for capital items, away from the usual personal income tax allowance. Depending on the amount of capital gain, you will pay a different tax rate.

How can you reduce your Capital Gains Tax?

Some straightforward ways to reduce the amount of Capital Gains Tax (CGT) you’re liable for are as follows:

  • Advertising costs on the property for sale
  • Stamp Duty
  • Estate agent fees
  • Solicitor fees
  • Any losses made on the sale of a buy to let property in the past
  • Capital item expenditure

These sorts of expenses can be subtracted from your capital gain. Other tax reliefs may also be available, depending on your personal circumstances and situation. If the property use to be your main residence, for example.

#4. Do you pay Inheritance Tax on a buy to let property?

Inheritance is often circumstantial to individual situations. Although it is taxable on buy to let properties, the amount will depend on you as an individual.

Because a buy to let property is a property you own, it will be a part of your estate, and therefore open to inheritance tax.

If you own the property outright, you will be taxed if the combined value of your estate goes above £325,000. If you’re married, the threshold doubles to £650,000. Anything above this is taxed at 40%.

As inheritance tax is a complex field, it’s always advisable to seek professional advice.

#5. Does a limited company get better tax allowances?

There’s no clear and concise answer to this quandary. It’s a case of considering multiple factors and an individual’s circumstances.

It is worth noting, however, that limited companies are not affected by the latest mortgage interest relief restrictions from April 2017. Interest for a limited company is seen as a business expense and something that can be deducted against the income of the business.

Currently, limited companies pay corporation tax at a fixed rate, regardless of the profits. This rate is set to be reduced to 17% by 2020, making it very attractive for any ‘higher rate’ taxpayers. However, it’s not as easy as using a limited company to save yourself money.

You may take money out of a company as an individual via a dividend which is tax free (upto £5,000). Anything above this has variable rates, depending on your tax bracket. Although it is at a lower rate that normal tax. Another option is to take a salary, but because of National Insurance and PAYE, it often works out more costly than paying dividends.

Limited companies do not qualify for any annual allowance on capital gains either, so trying to extract monies through the sale of a buy to let property could actually be less tax efficient.

Filing corporation tax returns are often more time consuming and testing than a self-assessment form too, despite lower tax rates.

So, transferring a current buy to let property to a limited company could be a way of tax relief but will no doubt trigger stamp duty charges and capital tax gains. It’s a balancing act which can prove fruitful but would need a professional to assess your situation.

Tax on a Buy to Let property – disclaimer

The information above is of a general nature and not specific to any one individual circumstance. It’s an overview of regulations. Whilst MortgageKey endeavour to remain unbiased, accurate and error free, we do not authorise it as that. Always obtain legal and tax advice before taking action.

If you’re looking for more advice and enquiring about  a Buy to Let mortgage, please get in touch with one of our expert advisors today!

Return to Guides

Latest Guides

8 Iconic Christmas Movie Homes – How much they cost today & their estimated mortgage rates House Purchase
8 Iconic Christmas Movie Homes – How much they cost today & their estimated mortgage rates

For millions... Read More

What Information Do I Need To Remortgage? Remortgaging
What Information Do I Need To Remortgage?

At MortgageKey, our mortgage advisors are expertly placed to assess your circumstances and... Read More

The Benefits of a Let to Buy Mortgage Let to Buy
The Benefits of a Let to Buy Mortgage

Moving home but don’t want to sell? A Let to Buy Mortgage could be the option for... Read More

7 Things to Know About Shared Ownership Mortgages Shared Ownership
7 Things to Know About Shared Ownership Mortgages

Shared Ownership mortgages are often seen as the lifeline for those on low or middle incomes... Read More

Think Carefully Before Securing Debts Against Your Property.

Your Home Maybe Repossessed If You Do Not Keep Up With Your Repayments.

Ready to talk? Speak to an expert today: 0800 077 8980