What Taxes Are Involved With Buy to Let? (2022)

Daniel Williams

Senior Property Writer

Updated 15 April, 2021

8 Min Read

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 2022 and the ways you can get some buy to let tax relief.

Jump to section

Tax on Buy to Let Income

Capital Gains Tax

Stamp Duty Tax

Tax Relief on Buy to Let Mortgages

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.

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.

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Current Income Tax Rates 2022

As of the 2021/22 tax year, 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 £1,060 per month on rent, the current national average according to Homelet.

Over a year, that will result in an annual income of £12,720, so you would have to pay tax on that figure as it’s over the personal allowance.

However, let’s say you own a London property, an area with some of the highest rental figures.

The current average in London is £3,618, according to Zoopla.

Using this figure, you will earn £43,416 per year. This will mean you will pay the basic rate of tax.

It’s important to note, though, that your rental income gets added to any other income you earn.

So, while you could earn £43,416 on the side with property, you may also earn £30,000 a year in a full-time job.

This will push you to the next tax threshold, meaning you are subject to the 40% tax bracket.

You will pay this tax every tax year, which runs from April 6 to April 5 the following year.

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

It’s not just these running costs that you can deduct, though. If you need to replace a domestic item, you can deduct this as ‘replacement of domestic items relief.’

Domestic items include replacing beds, sofas, carpets, curtains, fridges, and crockery or cutlery.

To be eligible for this, the items bought must only be used for tenants in the property. The previous items must no longer be used.

Learn more about landlord taxes and regulations by reading our guide to buy to let rules.

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 2022, 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 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

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 2022

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.

Interestingly, suppose you make a loss on a property. In that case, you can offset it when selling any other assets, which are carried forward indefinitely.

For example, let’s say you’re a portfolio landlord with multiple properties.

Upon selling one of your assets, you make a £50,000 loss. This 50k loss will increase the tax-free gain you make when selling another one of your properties.

Like income tax, you claim your losses through a self-assessment tax return. You will need to make this claim within four years of making the loss.

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.

So, you’re earning a profit of around £130,000 on the sale of your asset. After deducing the extra fees, this comes down to £124,500.

On top of this, you can use your capital tax allowance of £12,300. That means capital gains tax will apply to the leftover £112,200.

With this in mind, you’ll pay 18% of the basic rate on £20,270 of this gain. That’s because, while the higher rate threshold is £50,270, you’ve used £30,000 of that on your income.

Then you will pay 28%, the higher rate, on the remaining total, which comes to £91,930.

Overall, you will pay about £29,388 in capital gains tax on buy to let property.

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

Aside from this, there’s also tax relief available. For instance, if the property you are selling was previously a main residence, the gain may be reduced.

It’s also important to note that you can’t deduct any costs linked with the general upkeep of a property and can’t deduct any mortgage interest.

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.

Stamp duty tax was one of the major buy to let tax changes in 2020 and 2021, with rates cut in 2020 due to the covid-19 crisis.

However, these cut rates ended in October 2021, meaning investors will pay normal rates in 2022.

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Current Stamp Duty Tax Rates in 2022

Those buying a second property in the UK pay an additional 3% surcharge on stamp duty.

This means that if you are buying a buy to let property below £125,000, you will pay 3% stamp duty. This rate increases at different thresholds, with you only paying tax on the money that falls into that threshold.

So, if you buy a property worth £250,000 in the UK in 2022, you will pay around £10,000 in stamp duty.

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

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

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.

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.

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.

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