What Taxes Are Involved With Buy to Let? (2024) (2024)

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.

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.

As of the 2023/24 tax year, basic taxpayers will pay a 20% tax rate on buy-to-let income, while higher tax brackets will pay 40%. Additional rate taxpayers will have to pay at a 45% rate.

You will pay the higher tax rate if you earn over £50,000, with the additional rate fees when you reach over £150,000.

The current personal allowance, the amount you can earn before paying tax, sits at £12,500.

Rental income tax in Scotland is the same as it is in England, unlike some other forms of buy-to-let tax.

So, what does this mean in practical terms?

Let’s say you’re charging £1,175 per month on rent, the current national average according to Homelet.

Over a year, that will result in an annual income of £14,100, so you would have to pay tax on that figure as it’s over the personal allowance.

However, let’s say you own a London property, an area with some of the highest rental figures.

Homelet’s statistics indicate London has an average rent of £1,975, so that would mean you would get an average annual income of £23,700.

This would still be over the threshold, so you would still pay the basic rate of income tax. You would pay the same level of rental income tax in Scotland as well.

It’s important to note though, that your rental income gets added to any other income you earn.

So if you earn £23,700 a year from your investment property and have a salary of £30,000 from your regular job, this would put you over the threshold of the higher tax bracket, meaning you pay 40% income tax.

You will pay this tax every tax year, which runs from the 6th of April to the 5th of April the following year. Income tax on buy-to-let properties is one of the main ways you will be taxed for your investment property.

Buy to Let Tax Relief: Income Tax

Like other taxes on this list, you can get buy to let tax relief on income tax in the form of allowances and expenses.

Here you can minimise the tax you have to pay by deducting expenses from your rental income.

For instance, for residential properties, there’s a bunch of costs you can deduct for the day-to-day running of the property. Keeping track of these is important for reducing your buy-to-let income tax.

According to the official government website, these expenses include:

• Letting agent fees
• Utility bills like water and electricity
• Maintenance and repairs
• Council tax
• Interest on property loans
• Accountants’ fees
• Legal fees for lets of a year or less
• Buildings and contents insurance
• Other costs like phone calls and advertising

It’s not just these running costs that you can deduct, though. If you need to replace a domestic item, you can deduct this as ‘replacement of domestic items relief.’

Domestic items include replacing beds, sofas, carpets, curtains, fridges, and crockery or cutlery.

To be eligible for this, the items bought must only be used for tenants in the property. The previous items must no longer be used. This can be a clever way of getting buy-to-let income tax relief, while also keeping your tenants happy.

Learn more about landlord taxes and regulations by reading our guide to buy to let rules.

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 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.

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.

Capital gains tax on buy-to-let property has different tax rates than income tax.

Here, the basic rate is 18%, with both higher rate and additional rate taxpayers paying 28% on the gains they make when selling a property.

You will pay this tax on the profit you make rather than the selling price of the property. You can also deduct any expenditure linked to selling the house, like broker fees.

The tax will need to be paid by submitting a “residential property return” within 30 days of completing the sale.

Interestingly, suppose you make a loss on a property. In that case, you can offset it when selling any other assets, which are carried forward indefinitely.

For example, let’s say you’re a portfolio landlord with multiple properties.

Upon selling one of your assets, you make a £50,000 loss. This 50k loss will increase the tax-free gain you make when selling another one of your properties.

Like income tax, you claim your losses through a self-assessment tax return. You will need to make this claim within four years of making the loss.

So, let’s take a look at a practical example.

You’re selling a buy-to-let home for £250,000, after initially purchasing the property 15 years ago for £120,000.

You earned £30,000 in income this year.

Upon the original purchase, you paid around £1,000 in stamp duty, along with £1,500 in solicitor fees.

Now that you’re selling, you pay about £3,000 in both solicitor and estate agent fees.

So, you’re earning a profit of around £130,000 on the sale of your asset. After deducing the extra fees, this comes down to £124,500.

On top of this, you can use your capital tax allowance of £12,300. That means capital gains tax will apply to the leftover £112,200.

With this in mind, you’ll pay 18% of the basic rate on £20,270 of this gain. That’s because, while the higher rate threshold is £50,270, you’ve used £30,000 of that on your income.

Then you will pay 28%, the higher rate, on the remaining total, which comes to £91,930.

Overall, you will pay about £29,388 in capital gains tax on buy-to-let property.

Buy-to-Let Tax Relief: Capital Gains Tax on Buy-to-Let Property

Again, there are ways to gain buy to let tax relief on your capital gains payments.

This includes:

• Losses made upon the sale of a property
• Solicitor fees involved with the selling process
• Estate agent fees involved with the selling process
• The expenditure involved with advertising the property for sale
• Stamp duty land tax

Aside from this, there’s also tax relief available. For instance, if the property you are selling was previously a main residence, the gain may be reduced.

It’s also important to note that you can’t deduct any costs linked with the general upkeep of a property and can’t deduct any mortgage interest.

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.

Current Stamp Duty Tax Rates in 2024

Those buying a second property in the UK pay an additional 3% surcharge on stamp duty.

This means that if you are buying a buy-to-let property worth less than £250,000, you will pay 3% of the property’s value as stamp duty. So if you buy a property for £200,000, you will pay £6000 on top as stamp duty.

So, if you buy a property worth £250,000 in the UK, you will pay around £10,000 in stamp duty.

You have 14 days after you complete the purchase of a property to pay the stamp duty owed.

Take a look at the following table for current stamp duty charges on property in England and Northern Ireland, to get a better understanding of what buy-to-let tax you will need to pay.

If you want to work out current rates, the easiest way is to use a stamp duty calculator, like the one here at RWinvest.

Buy to Let Tax Rates in Scotland and Wales

These figures are slightly different in Scotland and Wales compared to England, as changes occurred during the Scottish budget in December 2022.

Stamp duty is now called Land and Buildings Transaction Tax, or LBTT, and is broadly similar to how stamp duty works in England just with different rates.

Again, if you are buying a second property then you will be charged an additional 6% on top of what you would pay normally.

Between £145,001 to £250,000, you will pay a 6% charge, with a 9% charge on properties worth between £250,001 to £325,000.

You can expect a 14% charge on properties worth between £325,001 to £750,000 and will pay a 16% tax for properties over £750,000.

In Wales, on the other hand, Land Transaction Tax rates are slightly different.

Depending on your finances, you may opt for a buy-to-let mortgage when buying a rental property.

Buy-to-let 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 have 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.

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 it isn’t for everyone.

Limited companies tend to get more tax benefits than an individuals. 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 & RCCIL 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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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.