Buy-To-Let Tax | Investing in buy-to-let properties could bring promising returns, yet the associated expenses could impact net income. This article will explore the tax expenses on buy-to-let properties in detail.
1. Stamp Duty Land Tax On A Buy-To-Let Property
Buy-to-let stamp duty applies to properties intended for rental purposes. There is a minimum 5% Stamp Duty Land Tax (SDLT) surcharge if buying the property results in owning more than one property.
Anyone purchasing a second property that isn’t their main residence, including holiday lets and properties bought for children (with parents listed on the title deeds), will face higher rates. The current SDLT rates for buy-to-let properties, as set by HMRC, are:
| Property Price | Stamp Duty Rate |
| Up to £250,000 | 5% |
| £250,001 – £925,000 | 10% |
| £925,001 – £1.5 million | 15% |
| Over £1.5 million | 17% |
SDLT must be paid within 14 days of completing the property purchase, usually handled by the solicitor. When selling the property, the SDLT paid can be deducted from future capital gains.
Suppose you’re buying your first (and only) property to rent out. In that case, you will pay standard residential stamp duty rates without any first-time buyer relief, but typically without the additional property surcharges. If it’s your first buy-to-let property but you already own another property, you will be liable for the buy-to-let/additional property surcharges.
2. Capital Gains Tax On A Buy-to-Let Property
When you sell a buy-to-let property for more than the purchase price, after deducting costs such as stamp duty, estate agent fees, and solicitor fees, the profit is considered a capital gain subject to Capital Gains Tax (CGT).
As an individual, you receive an annual allowance specifically for capital gains, which is separate from your personal income tax allowance.
For the 2024/2025 tax year, this allowance is £3,000, down from £6,000 the previous year. Any capital gains exceeding the £3,000 allowance are taxed at 24% or 28%, depending on your total income and capital gains.
Reducing Your Capital Gains Tax Liability
To reduce the amount of Capital Gains Tax (CGT) payable on a buy-to-let property, you can deduct the following expenses from your capital gain:
- Losses 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
- Expenditure on capital items
Additionally, certain tax reliefs are available. If the property previously served as your primary residence, there could be a reduction in the taxable gain.
If your capital gain exceeds the CGT allowance, you must report the gain and pay the CGT due within 60 days of the sale. Failure to do so may result in interest charges and penalties for missing the deadline.
3. Income Tax On A Buy-To-Let Property
The rental income from a buy-to-let property is taxable and must be declared in your self-assessment tax return. The tax rate applied to your rental income corresponds to your income tax band:
- Basic rate taxpayers: 20%
- Higher rate taxpayers: 40%
- Additional rate taxpayers: 45%
For the 2023/24 tax year, these rates remain applicable. You will pay the higher rate if your income exceeds £50,000 and the additional rate if your income exceeds £150,000. The current personal allowance is £12,570.
In Scotland, the tax rates on rental income are the same as in England, although other aspects of buy-to-let taxation may differ.
Reducing Your Income Tax Liability
You can minimise the tax on your rental income by deducting allowable expenses. According to the official government website, these deductible expenses include:
- Letting agent fees
- Utility bills such as water and electricity
- Maintenance and repairs
- Council tax
- Interest on property loans
- Accountants’ fees
- Legal fees for lets of a year or less
- Buildings and contents insurance
- Other costs like phone calls and advertising
Beyond these running costs, you can also deduct the cost of replacing domestic items under the ‘replacement of domestic items relief.’ This includes items like beds, sofas, carpets, curtains, fridges, and crockery or cutlery, provided they are for tenant use and the old items are no longer in use.
4. Tax On Holiday-Let Properties
In the 2024 Spring Budget, the Government announced significant changes to the taxation of Furnished Holiday Lettings, effective from April 2025 onwards. These changes will align the tax treatment of holiday lets with regular long-term buy-to-let properties.
Key Changes:
Mortgage Interest Relief:
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- Holiday-let landlords will no longer be eligible for mortgage interest relief at higher rates on income tax. The relief will be capped at 20%, similar to long-term lets.
Capital Allowances:
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- The ability to claim capital allowances for fixtures and fittings purchased for the property will be removed.
Tax Reliefs:
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- Removal of Gift Holdover Relief.
- Removal of Business Asset Rollover Relief.
At Advantage Investment, our featured holiday let properties, like Park Hall Resort, are stamp duty-free and offer a guaranteed net return of 10%.
5. Inheritance Tax On A Buy-To-Let Property
Inheritance tax applies to buy-to-let properties, and the amount you owe depends on your specific circumstances. A buy-to-let property forms part of your estate for inheritance tax purposes.
Here’s how it works:
- Sole Landlord: If you own the buy-to-let property solely and your estate, including the property’s value minus any outstanding mortgage, exceeds £325,000, you are liable for inheritance tax.
- Married or Civil Partner: If you own the property jointly with a spouse or civil partner, each has an individual threshold of £325,000. This means inheritance tax becomes applicable if the combined value of your estate exceeds £650,000.
Any amount above these thresholds is taxed at 40%. Inheritance tax planning can be complex, it is advisable to consult with a professional tax or financial adviser to navigate these intricacies effectively.
Is investing through a limited company better for my tax position?
Investing through a buy-to-let limited company may help save on tax expenses in some cases. This depends on several factors, such as the number of properties you own, your need for immediate income, and your holding period.
Limited companies are not affected by the mortgage interest relief restriction from April 2020; they can fully deduct interest as a business expense.
Companies pay a fixed corporation tax rate, currently 19% for profits under £50,000, which is attractive compared to the 40% and 45% rates for higher-income taxpayers.
At Advantage Investment, we aim to provide a hassle-free investment journey for our clients. Our business partners can assist investors in setting up a limited company for buy-to-let properties. If you’re considering this strategy, please speak to Advantage Investment’s property experts today at +44 (0)151 433 9300 or via email at contact@advantageinvestment.co.uk for professional advice.
