What Taxes Are Involved With Buy to Let?

Current Income Tax Rates 2021 

As of 2021, basic rate taxpayers will pay a 20% tax rate on buy to let income, while higher rate tax brackets will pay 40%. Additional rate taxpayers will have to pay at a 45% rate.

You will pay the higher tax rate if you earn over £50,000, with the additional rate fees when you reach over £150,000.

The current personal allowance, the amount you can earn before paying tax, sits at £12,500.

So, what does this mean in practical terms?

Let’s say you’re charging £982 per month on rent, the current national average according to Homelet.

Over a year, that will result in an annual income of £11,784, so you wouldn’t have to pay tax on that figure as it’s under the personal allowance.

Buy to Let Tax Relief: Income Tax 

Like other taxes on this list, you can get buy to let tax relief on income tax in the form of allowances and expenses.

Here you can minimise the tax you have to pay by deducting expenses from your rental income.

For instance, for residential properties, there’s a bunch of costs you can deduct for the day-to-day running of the property.

According to the official government website, these expenses include:

• Letting agent fees
• Utility bills like 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

Capital gains tax on buy to let property has different tax rates than income tax.

Here, the basic rate is 18%, with both higher rate and additional rate taxpayers paying 28% on the gains they make when selling a property.

You will pay this tax on the profit you make rather than the selling price of the property. You can also deduct any expenditure linked to selling the house, like broker fees.

The tax will need to be paid by submitting a “residential property return” within 30 days of completing the sale.

So, let’s take a look at a practical example.

You’re selling a buy to let home for £250,000, after initially purchasing the property 15 years ago for £120,000.

You earned £30,000 in income this year.

Upon the original purchase, you paid around £1,000 in stamp duty, along with £1,500 in solicitor fees.

Now that you’re selling, you pay about £3,000 in both solicitor and estate agent fees.

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

Again, there are ways to gain buy to let tax relief on your capital gains payments.

This includes:

• Losses made upon the sale of a property
• Solicitor fees involved with the selling process
• Estate agent fees involved with the selling process
• The expenditure involved with advertising the property for sale
• Stamp duty land tax

Current Stamp Duty Tax Rates- Stamp Duty Holiday 

Before the stamp duty holiday deadline on June 2021, you can access cut stamp duty rates.

If you are buying a buy to let property below £500,000, you will pay 3% stamp duty, and for property between £500,000 and £925,000, you will pay an 8% charge.

Take a look at the following table for current stamp duty charges on property in England and Northern Ireland.

So, if you buy a property worth £250,000 in the UK before June 2021, you will pay around £7,500 in stamp duty.

You have 14 days after you complete the purchase of a property to pay the stamp duty owed.

If you’re purchasing the property after June 2021, though, you can expect to pay different tax rates.

Between July 2021 and September 2021, stamp duty rates are due to change.

Here are the following rates you can expect to pay on a buy to let property during that time frame.

Finally, these buy to let tax changes will end come October 2021, with typical rates resuming.

The typical rates for a buy to let investment are as shown in the table.

If you want to work out current rates, the easiest way is to use a stamp duty calculator, like the one here at RWinvest.

Buy to Let Tax Rates in Scotland and Wales 

These figures are slightly different in Scotland and Wales.

Scotland and Wales’ tax holiday changed on April 1, 2021.

If you buy a property in Scotland now, you will pay 4% tax on properties worth up to £145,000.

Between £145,001 to £250,000, you will pay a 6% charge, with a 9% charge on properties worth between £250,001 to £325,000.

You can expect a 14% charge on properties worth between £325,001 to £750,000 and will pay a 16% tax for properties over £750,000.

In Wales, on the other hand, Land Transaction Tax rates are slightly different.

For a Welsh property, you will pay the following rates for a buy to let property.

As previously mentioned, more and more landlords are starting to form limited companies, but is this right for you?

Well, while limited companies have some tax advantages, they can also incur different fees.

Firstly, limited companies are not impacted by the changes made to mortgage interest buy to let tax relief.

This is because interest can be classed as a business expense and is therefore fully deductible from your income.

Similarly, limited companies are subject to corporation tax, which is at a flat rate of 19%. This is hugely beneficial if you are an individual earning income in the higher tax brackets, as you will only have to pay 19% rather than 40 or 45%.