The five most common buy to let tax questions explained
Here are five frequently asked questions about tax on a buy to let property, according to MortgageKey:
1) Do you pay tax on buy to let property income?
It’s an income, so it’s taxable. Any rent you recoup from your properties needs to be declared when you complete your self-assessment tax return. The amount of tax you’ll pay will depend on the amount you earn and your tax bracket. The basic taxpayer rate is 20%, followed by 40% for higher rate and 45% for ‘additional rate’ tax.
However, when completing a tax return, you may not be aware that the amount can be reduced by deducting ‘allowable expenses’.
These are costs that you incur from being a landlord which can then be deducted from your overall tax bill. This includes:
- Council tax
- General repairs and maintenance
- Legal and professional fees
In April 2017, new tax laws for landlords were introduced, so it’s worth brushing up on the latest legislations and the proposed actions which will be rolled out over the next four years.
2) Do you pay Stamp Duty tax on a buy to let property?
Unlike the new law which sees first time buyers benefiting from Stamp Duty relief on any residential property up to the value of £500,000, additional Stamp Duty is payable on a buy to let property. The amount you will pay depends entirely on the price of the property.
Typical rates of Stamp Duty tax can be applied like this:
- 3% on the first £125,000
- 5% up to £250,000
- 8% up to £925,000
- 13% up to £1.5 million
- 15% on anything over and above.
If this is a second property (so it’s not your main residence), you can expect to pay somewhere in line with these rates. But the amount of Stamp Duty paid is deductible from any capital gains you may make once the property is sold.
3) Do you pay Capital Gains Tax on a buy to let property?
In short, yes. If you sell the property for more than you paid for it, after deducting costs such as stamp duty and legal fees, you are making a profit (gaining capital) – therefore the tax is applied. Despite this, as an individual, you can be entitled to an annual allowance purely for capital items, away from the usual personal income tax allowance. Depending on the amount of capital gain, you will pay a different tax rate.
However, there are some straightforward ways to reduce the amount of Capital Gains Tax (CGT), including:
- Advertising costs on the property for sale
- Stamp Duty
- Estate agent fees
- Solicitor fees
- Any losses made on the sale of a buy to let property in the past
- Capital item expenditure
These sorts of expenses can be subtracted from your capital gain. Other tax reliefs may also be available, depending on your personal circumstances and situation, such as if the property used to be your main residence, for example.
4) Do you pay Inheritance Tax on a buy to let property?
Inheritance will change according to individual situations. Buy to let properties will form part of your estate for inheritance tax, but the amount paid will depend on your personal circumstances.
If you own the property outright, you will be taxed if the combined value of your estate goes above £325,000. If you’re married, the threshold doubles to £650,000. Anything above this is taxed at 40%.
As inheritance tax is a complex field, it’s always advisable to seek professional advice.
5) Does a limited company get better tax allowances?
There’s no clear and concise answer to this question. It’s a case of considering multiple factors and an individual’s circumstances.
It is worth noting, however, that limited companies are not affected by the latest mortgage interest relief restrictions from April 2017. Interest for a limited company is seen as a business expense and something that can be deducted against the income of the business.
Currently, limited companies pay corporation tax. This rate is set to be reduced to 17% by 2020, making it very attractive for any ‘higher rate’ taxpayers.
You may take money out of a company as an individual via a dividend which is tax free (currently up to £5,000). Anything above this has variable rates, depending on your tax bracket, though dividend tax is lower than income tax. Another option is to take a salary, but because of National Insurance and PAYE, it often works out more costly than paying dividends.
Limited companies do not qualify for any annual allowance on capital gains either, so trying to extract monies through the sale of a buy to let property could actually be less tax efficient.
Filing corporation tax returns are often more time consuming and testing than a self-assessment form too.
So, transferring a current buy to let property to a limited company could be a way of tax relief but will no doubt trigger stamp duty charges and capital tax gains. It’s a balancing act which can prove fruitful but would need a professional to assess your situation.
Claire Lawton is a mortgage advisor at MortgageKey