What Taxes Are Involved With Buy to Let? (2023)

Daniel Williams
Daniel Williams
Senior Property Writer
Updated 28 March, 2023
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.

Keeping track of buy-to-let property tax and what you need to pay is important for your finances.

There can be serious buy-to-let tax implications that you might not be aware of, and could catch you off-guard.

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. Tax on buy-to-let property can be reduced if you know how.

Getting tax relief on buy-to-let mortgages, as well as understanding what tax on buy-to-let property you need to pay can really help property investors in the long run.

With that in mind, let’s take a deep dive into buy to let tax, the latest buy to let tax changes in 2023 and the ways you can get some buy to let tax relief.

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Tax on Buy to Let Income



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Capital Gains Tax



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Stamp Duty Tax



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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.

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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 305% since 2001. So, if you bought a property for £58,907, in 2023 you would make a profit of almost £180,000.

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 2023

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.

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.

There were new buy-to-let tax changes in 2022, as the government introduced a new stamp duty rate which was simplified from how it had been before.

 

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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. It can be a useful way to get tax relief on your buy-to-let mortgage but isn’t for everyone.

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. You essentially trade the tax relief on your buy-to-let mortgage for higher interest rates, so you still end up paying more.

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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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.

These buy-to-let tax implications mean inheriting property can prove to be very costly.

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?

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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 2023. According to the Homelet Rental Index, UK rent in February 2023 was 9.9% higher than a year prior. Savills’ latest predictions also predict house prices will increase by 6.2% by 2027.

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 buy-to-let 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 Properties?

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 2023?

Yes, buy-to-let property is still worth it in 2023. According to the Homelet Rental Index, UK rent in February 2023 was 9.9% higher than a year prior. Savills’ latest predictions also predict house prices will increase by 6.2% by 2027.

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 For Buy to Let Properties?

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 buy-to-let 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 and Merseyside’s best property agency in 2022.

We have excellent properties starting at just £94,950 with massive returns of up to 7%.

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

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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 January 2022. 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.

Daniel Williams
Daniel Williams
Senior Property Writer

Daniel Williams is a senior property writer at RWinvest. Regularly publishing in-depth articles on topics such as the best investment areas in the UK and guides on how to invest, Daniel has a keen eye for statistics and analysing property market changes.

Show Flat Now Complete

Vantage Point

Unique and High-Quality Residential Accommodation

Manchester Prices from £132,950

7% Assured Rental Yields 

North West Regeneration Hotspot

Limited Time Property Investment Deals

Deals of the Week

Limited Time Property Investment Deals

UK Prices from £124,950

High Assured Rental Income

Exclusive deals of the week

External Works Progressing Fast

Merchant's Wharf

Luxury Waterfront Apartments

Manchester Prices from £249,950

Up to 6.5% Projected Rental Return

Secure a Unit With as Little as £62,732

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