Whether you’re a first-time landlord or already have a number of properties under your belt, it’s important that you keep up to date with the taxes involved with Buy-to-Let property owners.
To help you better understand all the details that you need to know, we’ve created this easy-to-follow guide covering all the taxes you’re responsible for paying as a landlord as well as any tax reliefs you may be eligible to receive.
What is Buy-to-Let tax?
Landlords are required to pay tax on Buy-to-Let properties that they rent out to tenants. There are a number of different types of Buy-to-Let tax, each regarding a different element of the property which differ depending on whether the property is in England, Scotland or Wales. Landlords need to pay tax on the profit of renting out a property, after deductions for ‘allowable expenses’.
Allowable expenses are the things a landlord needs to spend money on in a day-to-day capacity, such as:
Letting agent fees
Legal fees for lets of a year or less
Legal fees for renewing a lease for less than 50 years
Accountant fees
Buildings and contents insurance
Interest on property loans
Maintenance and repairs to a property (not including improvements)
Utility bills
Rent, ground rent and service charges
Council Tax
Services like cleaners and gardeners
What types of tax are there on Buy-to-Let properties?
1. Stamp Duty (England) and Land Transaction Tax (Scotland and Wales)
Landlords are required to pay Stamp duty if they own properties in England, Land and Buildings Transaction tax in Scotland, or simply Land Transaction Tax in Wales.
Despite the different titles, this is the same type of tax for Buy-to-Let properties, all of which cost Landlords more with more expensive properties:
England
Property value | Stamp Duty |
|---|---|
£125,000 | 3% |
£250,000 | 5% |
£925,000 | 8% |
£1.5 million | 13% |
< | 15% |
Scotland
Property value | Land and Buildings Transaction Tax |
|---|---|
£145,000 | 4% |
£250,000 | 6% |
£325,000 | 9% |
£750,000 | 14% |
< | 16% |
Wales
Property value | Land Transaction Tax |
|---|---|
£180,000 | 3% |
£250,000 | 6.5% |
£400,000 | 8% |
£750,000 | 10.5% |
£1.5 million | 13% |
< | 15% |
Temporary changes to Stamp Duty
In the wake of the COVID-19 pandemic — resulting in a nationwide lockdown from March 2020 — the UK government made several temporary changes to the way stamp duty and land tax (SDLT) is calculated.
These changes were designed to stimulate the housing market following the lockdown slump. They are effective from 8th July 2020 and will return to normal after 31st March 2021.
Purchase price of property or lease | SDLT rate (until 31st March 2021) |
|---|---|
Up to £500,000 | 0% |
The next £425,000 (portion from £500,001 to £925,000) | 5% |
The next £575,000 (portion from £950,001 to £1.5 million) | 10% |
Remaining amount (portion above £1.5 million) | 12% |
You’ll also need to pay an additional 3% SDLT on any additional residential properties you buy, including buy-to-let.
For more information about the short-term changes to Stamp Duty and land tax in the UK, visit the government website.
2. Capital Gains Tax
If you’re a landlord and sell a Buy-to-Let property for more money than you paid for it — after deductions like Stamp Duty or solicitor fees — you are liable to pay Capital Gains Tax. Essentially, making a profit on the property sale means you’ve gained capital, making the tax apply to you.
You are, however, entitled to a personal annual allowance to set against any gain. As of the 2019.20 tax year, you have a £12,000 personal income tax allowance — if the gain of a sale is over £12,000, you’ll be taxed on the remainder at either 18% or 28%, depending on your income and capital gains.
3. Tax on rental income
Another tax on Buy-to-Let landlords is the income you receive as rent for a property. Any rent paid to you from a tenant living in one of your properties must be declared as part of your self-assessment tax return. The amount you are charged on your income (rent) is based on your income tax band:
Basic rate taxpayers — 20%
Higher rate taxpayers — 40%
Additional rate taxpayers — 45%
4. Inheritance tax
Inheritance tax is a specific tax that applies to properties that are in the name of someone who has died. Although this is most commonly used in cases of properties that are owned and lived in, it is still applicable to Buy-to-Let properties.
If you’re a landlord with properties and a Buy-to-Let mortgage that are solely in your name, then you’re liable to pay Inheritance tax if your property’s value — or the combined value of your estate if you own multiple properties — is greater than £325,000. If you’re married or in a civil partnership and are both named property owners, the inheritance tax kicks in at £650,000 as you each have a threshold.
Anything above your inheritance tax threshold tax will be taxed at 40%. For example, a property worth £400,000 will be taxed at 40%, but only for the £75,000 over the £325,000 threshold.
Tax reliefs
1. Buy-to-Let Mortgage tax relief
Prior to April 2017, landlords could reduce the tax on their rental profits by deducting expenses based on their tax band — 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers.
Permissible expenses included:
Interest on Buy-to-Let mortgages and other finance charges
Council tax, insurance, ground rent
Property repairs and maintenance
Legal and other professional fees
However, the new rules of tax relief for Buy-to-Let landlords have been phased in since 2017, meaning an end to the different rates of tax relief.
As of April 2020, landlords are no longer allowed to deduct any mortgage expenses from rental income as a way to reduce tax bills. Instead, you’ll receive a tax credit that is based on 20% of your mortgage interest payments.
The changes to Buy-to-Let tax, which have been gradually phased in since 2017, can potentially cause you to pay more tax in two ways:
If you’re either a higher or additional rate taxpayer, you will no longer get all the tax back on your mortgage repayments, as your tax credit will be capped at the basic 20% rate, rather than the top tiers.
You’ll now need to declare the income that was used to pay the mortgage on your tax return. This could force you into a higher tax bracket when combined with your income from other sources, such as a salary or pension.
2. Replacement of Domestic Items Relief (formerly Wear and Tear Allowance)
Up until April 2016, landlords who let furnished properties were able to claim Wear and Tear Allowance. This allowed landlords to cover the cost of replacing furnishings and finishings up to 10% of net rents.
The Wear and Tear Allowance has since been replaced by the Replacement of Domestic Items Relief, which benefits more landlords as it is no longer exclusive to furnished accommodation. When calculating a landlord’s profit through the rent they make from tenants, a deduction is given for the cost of replacing domestic items.
The domestic items that qualify for the relief include:
Moveable furniture
Furnishings such as carpets, curtains and linen
Household appliances such as white goods
Kitchenware such as crockery and cutlery
Televisions
Domestic items must be provided for the sole use of tenants to be applicable. The amount of relief a landlord receives is the cost of the item in a like-for-like replacement. If a landlord purchases a better quality item, they will only receive the deemed amount of a like-for-like exchange. If a landlord sells an old domestic item, the amount of capital gained will be deducted from the relief.
Landlord insurance
It’s crucial that landlords know about Buy-to-Let tax, but there’s plenty of other important information you need to know too. Landlord insurance, for example, is helpful, so you need to make sure you have a plan that works for you. At Swinton, we can provide you with a comprehensive plan tailored to your needs. Visit our Landlord Insurance page to learn more.