Buy to Let can be highly lucrative for private investors, particularly in certain high yields areas of the UK, but there are a number of buy-to-let taxes that prospective landlords should be aware of. Here we go through the three main ones - Capital Gains Tax, Income Tax and Stamp Duty Land Tax.
Capital Gains Tax
When you sell your buy-to-let property, you will need to pay Capital Gains Tax (CGT) on any profit that takes you over your annual tax-free capital gains allowance of £11,700 – or £23,400 if you own it as is a couple.
CGT is charged at 18% for basic rate taxpayers and 28% for higher or additional rate taxpayers.
The good news is that you can reduce your bill by offsetting costs like Stamp Duty and solicitor fees.
Income Tax
You will need to pay tax on your rental income; how much will depend on your income tax band, which are outlined below.
| Band | Taxable Income | Tax Rate |
|---|---|---|
| Personal allowance | Up to £11,850 | 0% |
| Basic rate | £11,851 to £46,350 | 20% |
| Higher rate | £46,351 to £150,000 | 40% |
| Additional rate | over £150,000 | 45% |
But, like CGT, you can offset your rental income against some expenses – these include letting agent fees, property maintenance and Council Tax.
Mortgage Interest Tax Relief
Previously, buy-to-let landlords could offset 100% of their mortgage payments against their rental income – meaning a smaller income tax bill.
However, in 2017, new legislation came in that phased out this tax relief. For the 2019-20 tax year, you can deduct 25% but from April 2020, you will not be able to deduct any mortgage costs from rental income.
Instead, buy-to-let landlords will receive a 20% tax credit, at the basic 20% rate, for their mortgage interest.
It is worth noting that this change in tax relief only impacts private landlords. If its a company that owns the rental property, they will still be able to declare rental income after deducting the mortgage.
Stamp Duty Land Tax
In England and Northern Ireland, all residential properties over £40,000 – or £125,000 if you’re a first-time buyer – will be liable for Stamp Duty Land Tax (SDLT).
The amount you pay is based on the property price and there are five different rate bands. Buy-to-let properties incur an additional 3% tax.
Stamp duty is always paid on completion, but to help you prepare we have created a simple calculator tool that will allow you to see how much stamp duty you will need to pay on your investment.
Stamp duty calculator
Explore our current buy-to-let opportunities or contact us on +44 (0)203 281 7434 to hear about our latest off-market options.
Alesco Property Investment does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
