This guide was last updated 21 February 2023
Landlords are currently facing a multitude of taxes, such as ‘one-off’ payments like Additional Stamp Duty on the purchase of an investment property and ‘ongoing’ payments like income tax on the rent received.
It can be daunting for many landlords, especially first-time landlords, so we have prepared a guide to help navigate this sometimes complex world of taxation.
This guide is in conjunction with Accord Mortgages and covers Stamp Duty for rental properties, Income Tax for rental income, repairs/improvements relief, furniture & fittings, Capital Gains Tax, and VAT. There is even a section outlining the differences between owning a rental property within a limited company.
Property taxes can be complex and, amongst all the other things that landlords need to consider, such as finding suitable tenants and ensuring the property meets all the necessary standards, it’s easy to forget about tax.
That’s where this guide comes in. We’ll explain the main things you need to know about taxes associated with your Buy to Let property.
Coreco are not tax specialists, so we urge anyone reading this to talk to an accountant or other qualified property tax specialist before taking any action.
When you purchase land or property, you will probably pay Stamp Duty Land Tax (SDLT) in England, Land and Buildings Transaction Tax (LBTT) in Scotland, or Land Transaction Tax (LTT) in Wales. The rate you pay will depend on the price you pay for the property, excluding any carpets, curtains and free-standing furniture, etc at the market value (the amount that you would pay for these on the open market and not an artificially constructed value).
From 1 April 2016, the rate of stamp duty was increased by 3% on second properties, which may be a second home or a buy to let property. This ‘extra’ tax is called Additional Stamp Duty land Tax (ASDLT).
Companies also pay Stamp Duty on all property purchases.
HMRC provides a calculator to enable taxpayers to establish the amount of SDLT payable:
Rental accounts are relatively easy to prepare for a single property, although you may still prefer the reassurance of using an accountant to look after your affairs. There are two main methods for putting together your accounts–‘accruals’ and ‘cash.’
Compiling your accounts on an accrual basis means that you put costs and payments into the accounts for the tax year when they occurred, not the tax year the money was actually received or paid out. Using a cash basis means you simply compile your accounts with costs and payments that were actually ‘paid’ in that tax year.
Since April 2017, the default is to use the ‘cash basis’ method for those landlords with rental income below £150,000 per year. We generally think this to be a lot easier for most landlords.
Individual landlords used to be able to claim all of their mortgage interest as a deductible cost against residential property income to significantly reduce their tax liabilities. However, this is no longer the case due to the Finance Act 2015. You now have to pay income tax on all rental income after a few small but allowable expenses have been deducted (see below).
You are then able to claim a tax credit worth the equivalent of the basic rate of interest (currently 20%) of the annual mortgage interest you have paid via your tax return. (This tax credit is fixed at the basic rate regardless of the rate at which you pay income tax).
Residential landlords can deduct certain expenses from their rental income in order to reduce their tax bills. Landlords typically claim the following costs:
Keeping your rental property looking attractive can cost a fair amount. Repairs and improvements are usually both allowable costs, but it is an important distinction as tax relief is claimed in one of two ways, depending on whether building work is repairing or replacing pre-existing materials or whether it is an improvement.
Repairs and maintenance costs can be deducted from rental income to reduce your income tax bill and usually include:
Capital items are work that improves the property, such as an extension. These costs can be claimed to reduce your capital gains tax when you come to sell the property.
Sometimes it is hard to tell if an item is a replacement or an improvement, so, if you’re unsure, do take tax advice.
Since April 2016, it is only possible to claim the actual cost of repairing or replacing furniture and fittings. This means that you should keep your receipts, etc. There is no longer a 10% wear and tear allowance on furnishings and appliances.
When the time comes to sell, hopefully, your property will have increased in value. Unlike selling your main home, this increase in value is taxable as a ‘capital gain.’
The good news is that you can claim the costs of purchasing, selling, and improving the property.
If the property was your main residence at any time then there may be some tax reliefs available. You may also qualify for up to £40,000, letting relief per owner. You can find more information on capital gains tax (including letting relief) here. Letting relief is complex and if you wish to see whether you qualify for this relief, your best option is to seek advice from a qualified tax adviser.
An example of taxable gain is below:
|Less Purchase Price||(£175,000)|
|Less Purchase Costs (e.g. professional fees)||(£5,000)|
|Less any capital improvements||(£10,000)|
|Less any selling costs (e.g. professional and advertising fees)||(£1,750)|
|Less any tax reliefs (e.g. capital losses)||(£750)|
|Net taxable gain||£57,500|
There is an annual capital gains allowance for each individual owner (currently £12,570) to offset net gains/losses in the year of disposal. Everything above this allowance is currently taxed at 18% or 28% for residential property, depending on your normal income tax rate.
If you are thinking of selling a property that has significantly increased in price then it may be worth taking individual tax advice early in the process and definitely before the sale itself as there may be actions that can be taken in order to minimise your tax burden.
Landlords now have 60 days to report and pay capital gains tax when selling a property (an increase by 30 days, which was announced in October 2021).
New legislation was introduced in April 2022, which means any VAT registered businesses with turnover below £85,000 must now file their VAT return digitally, which means using special accounting software. Visit www.gov.uk for more details.
If you use a limited company to buy, sell and rent out a property, then there are some major differences that might be in your favour. The main reason many landlords are now using a limited company for their rental properties is that you can still offset all costs of keeping that property as a rental property–including using all the mortgage interest as a deductible cost. Also, any profit the company makes, although that is set to rise. If landlords using a limited company wish to grow their portfolio, they can leave any profit in the business to accumulate and then use those funds for a deposit on another property. This is will be quicker than taking the profit as a private individual since it would then be taxed as personal income.
You will potentially have to pay further tax/NIC when you want to take the profits out of the company as salary (PAYE/National Insurance) or dividends (dividend tax). From April 2022, the NIC rate increased by 1.25%.
Also, limited companies have no allowance for Capital Gains Tax as individuals do.
Lastly, there are costs and administration involved in setting up and running a limited company and different rules for passing on the shares of a limited company should you die. Using a limited company for landlord’s rental businesses is very popular at the moment for the above reasons.
If you would like to learn more about the pros and cons of owning rental properties in a limited company, then please read our Guide to Limited Company Buy To Let.
There may be Inheritance Tax (IHT) advantages if your property is held in a trust.
If you are thinking of using a limited company or a trust, then it is worth taking professional advice. Generally speaking, lenders genuinely do not want to lend on any property that is held in trust, so your choice of lenders would be very, very narrow indeed.
This guide is intended as a brief overview of the main ways that your residential property investment will be taxed and is correct at the time of publication. The next steps for landlords might include:
This guide has been brought to you by Coreco in conjunction with Accord Mortgages.
To speak to one of our experience Buy-To-Let advisers please call us now on 020 7220 5110 or fill out the form below to arrange a no obligation chat.
Watch Coreco Managing Director Andrew Montlake talk to Thisismoney.co.uk editor Simon Lambert about investing into Buy To Let on the Investing Show here.
There is no guarantee that it will be possible to arrange continuous letting of the property, nor that rental income will be sufficient to meet the cost of the mortgage.
Your property may be repossessed if you do not keep up repayments on your mortgage.