Buy-to-Let Taxes Explained

When setting out to acquire a property as an investment or not as your main residence, one of the avenues you could explore is the buy-to-let property market.

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This will however include a different set of taxes than other properties and so it is important to understand exactly what taxes are involved and what additional payments you may be subjected to.

Paying stamp duty on a buy-to-let property

In England, when buying a buy-to-let property you will have to pay stamp duty land tax.

The stamp duty has to be paid within 30 days of the purchase of the property, though more often than not, your solicitor will pay the fee on the day or right after the completion of the property acquisition. The current rates are:

Amount

Stamp duty

Up to £125,000

3%

Up to £925,000

8%

Up to £1.5 million

13%

Any amount over £1.5m

15%

Capital gains tax on a buy-to-let property

In addition to stamp duty, you will also be subject to capital gains tax if you choose to sell your buy-to-let property. That is of course if the sale price of the property is higher than what you initially acquired the property for and following deductions of additional costs including stamp duty, agent fees and conveyancing fees.

In short, by selling the property for more than you bought it, you are turning over a profit and are subsequently subject to a capital gains tax. There is however a personal allowance of up to £12,000 for capital gains acquired from the sale of your buy-to-let property and is independent of your annual income tax allowance.

If, however, your capital gains are in excess of £12,300 a tax rate of either 18% or 28% will be applicable. If, after the initial £12,300 allowance, the total capital gain is less than £50,000, the rate is 18%, and if greater, the rate is 28%. The tax declaration is to be reported on your self-assessment tax return and paid within 30 days of the sale of the property.

Paying tax on rental income

Furthermore, with a buy-to-let property you will be taxed on the rental income you receive. As part of your self-assessment tax return, you will have to declare any rent that you receive, with the tax rate charged being in accordance with the tax band that you fall under.

a woman doing her tax return

What is tax deductible on a buy-to-let?

It is however worthwhile knowing how the income tax from your buy-to-let property can be minimised through deducting a handful of allowable expenses from your rental income.

These allowable expenses include council tax, insurance, moderate property repairs and maintenance (i.e. an extension will not fall under allowable expenses, though can be deducted from capital gains if or when your property is sold), legal fees, estate agent fees, management expenses, interest on the mortgage as well as additional property expenses such as advertising for tenants and building insurance premiums.

Are buy-to-let properties subject to inheritance tax?

Finally, your buy-to-let property will be subject to inheritance tax. The property will make up part of your estate and if you operate as a single landlord and if your property value, subtracted by the outstanding mortgage (if any at all) exceeds £325,000 your estate (and with it the property) will be subject to inheritance tax. The threshold is doubled to £650,000 if you are married or in a civil partnership. Beyond these thresholds the tax rate stands at 40%. You can optimise your inheritance tax in order to pay the smallest amount possible, however this requires careful tax planning and most often, expert advice.

As you can see there are a variety of taxes to consider when purchasing a buy-to-let, which all have implications on the affordability and profitability of the property. Make sure you’ve considered them all before beginning your buy-to-let journey.

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