How To Find Out About the Best Property Investment Deals cover vector illustration How To Find Out About the Best Property Investment Deals cover vector illustration

What Taxes Are Involved With Buy to Let?

Let’s be honest; no one likes paying tax.

Watching money disappear to unnamed and unknown sources can be annoying at the best of times, and it can be even more problematic for a buy to let investor.

Taxes eat up profits like nothing else and can halve your income if you aren’t careful.

If you’re about to get into the property investment world, it’s vital you understand what buy to let property tax you can expect to pay, and just how to reduce the levels of payment.

With that in mind, let’s take a deep dive into buy to let tax, the latest buy to let tax changes in 2021 and the ways you can get some buy to let tax relief.

Contents

Jump to section

View More

Tax on Buy to Let Income



Investment goals icon
View More

Capital Gains Tax



View More

Stamp Duty Tax



Contents vector icon
View More

Tax Relief on Buy to Let Mortgages



Buy to Let Income tax illustration Buy to Let Income tax illustration

Buy to Let Tax: Tax on Buy to Let Income

The dreaded tax on buy to let income can be one of the harsher tax levels on buy to let property, depending on how much you earn.

Income tax is the tax paid on the profit you get from the rental properties you have. This is essentially the sum left over after you’ve added your rental income and took away any expenses or allowances you’re eligible for.

Naturally, this income is made in bulk by rental income, which is the money you earn through rent from your tenants.

Income Tax Illustration Income Tax Illustration

However, there are other ways you can earn income from your rental property such as if your tenants provide extra payments for arranging repairs and covering utility bills.

If you charge non-refundable deposits or have money that’s been kept over from a returnable deposit following the end of tenancy, this can also get factored into your total income.

You need to report this income, if it’s more than £2,500, on a self-assessment tax return. A guide for which is here.

Invest with RWinvest Today 

View Properties

Buy to Let Tax: Capital Gains Tax on Buy to Let Property 

One of the ultimate ambitions in property is to sell your assets later down the line for a massive profit.

Properties in Manchester, for instance, have increased on average by 368.7% since 2001. So, if you bought a property for £43,750 in 2021, you would make a profit of just over £161,000.

While this would be a hugely successful property venture, you won’t be able to take all the profits. Unfortunately, you will have to pay capital gains tax.

Capital gains illustration Capital gains illustration

Capital gains are the profit you make when you sell a property, with costs like stamp duty and solicitor and agent fees deducted from the profit.

Notably, capital gains tax doesn’t usually apply when you’re selling your main residence but will likely need to be paid upon the sale of buy to let property or a second home.

Like income tax, taxpayers get an annual capital gains tax allowance, allowing you to earn up to £12,300 in profit. If you jointly own an asset with a partner, you can combine this allowance, enabling a total of £24,600.

You can’t carry this allowance forward every year, though, so you will only ever get a maximum of £24,600 if the current rules continue for the future.

Exchange and Complete Your Purchase illustration Exchange and Complete Your Purchase

One crucial factor to note is if you lived in your property before renting it to tenants. If that’s the case, you may be eligible for a Private Residence Relief upon sale of the property.

This means you won’t have to pay capital gains tax for the time you lived there, plus an additional 18 months from the time you moved out.

However, buy to let tax changes have meant that these rules are now restricted, with new regulations reducing this 18 months to nine.

Additionally, the previous £40,000 of lettings relief you could claim now only applies to landlords who live alongside their tenants.

For those looking to invest in property, knowing about taxes is essential. Find out what buy to let tax you'll be expected to pay, and the ways you could reduce tax payments.

Daniel Williams, RWinvest

Current Capital Gains Tax on Buy to Let Property Rates 2021

Stamp duty tax vector illustration Stamp duty tax vector illustration

Buy to Let Tax: Stamp Duty Tax 

Another key buy to let property tax is stamp duty.

Stamp duty is a tax paid by those in England and Northern Ireland when you purchase a property. It has alternative names and rates in Scotland and Wales, where it is known as land and buildings transaction tax and land transaction tax.

Stamp duty rates can fluctuate depending on how much the price of the property is.

Recently, stamp duty tax has been one of the most major buy to let tax changes, with rates cut in 2020 due to the covid-19 crisis.

Announced in July 2020, the stamp duty holiday was a tax break that gave investors and first-time buyers cut rates until June 2021.

Designed to promote activity in the property market during lockdowns and the pandemic, investors can save around £4,500 on average, with the potential to save up to £15,000 on certain deals.

Therefore, if you want the best price on a property, you should consider purchasing a property and completing the sale before the end of June 2021 to get the best deal possible.

Invest with RWinvest Today 

View Properties

Buy to Let Mortgage illustration Buy to Let Mortgage illustration

Buy to Let Tax: Tax Relief on Buy to Let Mortgages 

Depending on your finances, you may opt for a buy to let mortgage when buying a rental property.

Buytolet mortgages can be more expensive than traditional rental properties and can involve higher minimum deposits of 25%.

A lot of buy-to-let mortgages are usually interest-only, too, and will require you to pay the interest of the loan every month without touching the overall cost of the mortgage. To pay this value off, you will have to pay additional fees.

These mortgage payments can eat away at your profits, but luckily you can get tax relief through your buy to let mortgage.

Unfortunately, there’s been several buy to let tax changes regarding buy to let mortgages over the years, and it’s no longer as beneficial as it has previously been.

Mortgage Interest illustration Mortgage Interest illustration

Since April 2020, buy to let investors are no longer able to deduct mortgage expenses from rental income. Instead, they now receive a tax credit based on 20% of their monthly interest payments.

It’s important to note that these rates target individual landlords, which is why more landlords than ever are starting to form limited companies.

Limited companies tend to get more tax benefits than an individual. For instance, mortgage interest payments can receive 100% tax relief against the rental property income.

It naturally sounds like a no-brainer to form a company, but it’s important to remember that interest rates are usually higher for companies.

Regardless, estate agent Hamptons found a whopping 41,700 new buy to let companies were formed in 2020, which was an overall increase of 23% since 2019.

3 Units Remaining

The Summit

Stylish Baltic Triangle Living

Liverpool Prices from £139,950

Assured 7% NET Rental Yields

15-20% Below Market Value

Invest From £35,000

ELEMENT - The Quarter

North West's First Eco-Development

Liverpool Prices from £74,950

8% NET Rental Return

300m Away From New £1bn Royal Hospital

10% Deposit

Off Market Manchester Apartments

Premium Residential Investment

Manchester Prices from £219,112

5.5% NET Rental Return

10% Deposit Required

Buy to Let Tax: Inheritance Tax 

The final tax you could likely pay is inheritance tax.

If you own the property solely, your buy to let property will form part of your estate upon death. This will mean the property is liable for inheritance tax rates of 40% if the value of the property exceeds £325,000.

For couples, it’s slightly different. If you’re married or have a civil partner, then each threshold is combined, meaning inheritance tax will only be in effect after £650,000.

If you want to discuss inheritance tax in detail, be sure to speak to an expert financial adviser.

Buy to Let Tax: Should You Form a Limited Company?

Invest with RWinvest Today 

View Properties

FAQ’s

On a buy to let property, you will have to pay tax on the rental income you earn. You need to declare this on your self assessment tax return. You will pay differing rates depending on how much income you earn, with a base rate of 20% up to 45% for the additional rate.

You will also have to pay stamp duty tax upon purchase of the property and capital gains tax when you sell the property.

To avoid paying tax on a buy to let property, you should claim for expenses. The official government website states you can claim expenses like letting agent fees, maintenance and repairs, and council tax, amongst others.

Yes, buy to let property is still worth it in 2021. According to the Homelet Rental Index, UK rent in March 2021 is 3.4% higher than a year prior. Savills’ latest predictions also predict house prices will increase by 4.0% in 2021, with a 21.1% growth expected by 2025.

To avoid paying tax on rental income, you can claim various expenses such as letting agent fees, maintenance and repairs, and general costs needed for the day-to-day running of the property.

As of April 2020, investors can claim a tax credit based on 20% of their monthly interest payments. Previously, investors could deduct mortgage expenses from their rental income

Tenants are responsible for paying council tax if a private landlord rents the entire property to the individual or family.

Some expenses are tax-deductible on a buy to let property. This can include general maintenance and repair costs, insurance fees like landlord insurance, cost of services like ground rent, general utility bills, and more.

Yes, solicitor fees are tax-deductible for income tax on a buytolet property.

Income tax is based on how much income you earn through rent on a buy to let property. Basic-rate taxpayers will pay a 20% rate, higher-rate tax brackets will pay 40%, and additional rate taxpayers will pay a 45% rate. You don’t get taxed on income up to £12,500.

What Tax Do I Pay on Buy to Let?

On a buy to let property, you will have to pay tax on the rental income you earn. You need to declare this on your self assessment tax return. You will pay differing rates depending on how much income you earn, with a base rate of 20% up to 45% for the additional rate.

You will also have to pay stamp duty tax upon purchase of the property and capital gains tax when you sell the property.

How Do I Avoid Paying Tax on a Buy to Let Property?

To avoid paying tax on a buy to let property, you should claim for expenses. The official government website states you can claim expenses like letting agent fees, maintenance and repairs, and council tax, amongst others.

Is Buy to Let Still Worth it 2021?

Yes, buy to let property is still worth it in 2021. According to the Homelet Rental Index, UK rent in March 2021 is 3.4% higher than a year prior. Savills’ latest predictions also predict house prices will increase by 4.0% in 2021, with a 21.1% growth expected by 2025.

How Do I Avoid Paying Tax on Rental Income?

To avoid paying tax on rental income, you can claim various expenses such as letting agent fees, maintenance and repairs, and general costs needed for the day-to-day running of the property.

What is the Tax Relief on Buy to Let Mortgages?

As of April 2020, investors can claim a tax credit based on 20% of their monthly interest payments. Previously, investors could deduct mortgage expenses from their rental income

Who Pays Council Tax on Buy to Let?

Tenants are responsible for paying council tax if a private landlord rents the entire property to the individual or family.

What Expenses Are Tax-Deductible Buy to Let?

Some expenses are tax-deductible on a buy to let property. This can include general maintenance and repair costs, insurance fees like landlord insurance, cost of services like ground rent, general utility bills, and more.

Are Solicitors Fees Tax Deductible for Buy to Let?

Yes, solicitor fees are tax-deductible for income tax on a buytolet property.

How is Buy to Let Income Taxed?

Income tax is based on how much income you earn through rent on a buy to let property. Basic-rate taxpayers will pay a 20% rate, higher-rate tax brackets will pay 40%, and additional rate taxpayers will pay a 45% rate. You don’t get taxed on income up to £12,500.

Start Your Investment Journey With RWinvest

We hope you enjoyed our detailed guide to buy to let tax.

Keep in mind that these taxes aren’t the only expenses you’re likely to encounter when purchasing a buytolet property. Besides the previously mentioned buytolet mortgages, you can also expect additional fees such as solicitor fees and insurance like landlord insurance.

Property can be complicated, so it’s vital to research before starting your venture. You can read excellent tools like the buy to let property tax handbook for a deep dive into the topic.

However, if you’re ready for these expenses and are prepared to invest, why not do it with us?

We are RWinvest, a property investment company voted as the North West’s best property business in 2020

We have excellent properties starting at just £64,950 with massive returns of up to 8%.

Contact us today and take a look at all our latest opportunities and get exclusive deals only with RWinvest.

Hurry now while stocks last.

Alternatively, if you want to know more about how to become a landlord, be sure to check out our other in-depth guides.

Disclaimer:

This guide was updated in April 2021. Figures and data provided may be outdated upon reading. Note this is not financial advice and is just a simple guide. If you want to find out more information, check out reading literature like the buy to let property tax handbook and contact an expert financial advisor for personal finance advice.

3 Units Remaining

The Summit

Stylish Baltic Triangle Living

Liverpool Prices from £139,950

Assured 7% NET Rental Yields

15-20% Below Market Value

Invest From £35,000

ELEMENT - The Quarter

North West's First Eco-Development

Liverpool Prices from £74,950

8% NET Rental Return

300m Away From New £1bn Royal Hospital

10% Deposit

Off Market Manchester Apartments

Premium Residential Investment

Manchester Prices from £219,112

5.5% NET Rental Return

10% Deposit Required