The 5 most Frequently Asked Questions about Tax on a Buy-to-Let Property 

Important to know

A mortgage is a loan secured against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.

It’s no secret that when it comes to taxes, everyone wants to know how they can either pay less or avoid paying more.

It’s important to remember that taxes are a part of almost every step of the home-buying or -selling process, even if we often take them for granted. If you’re considering a buy-to-let mortgage or property, it pays (literally) to know when and where you’ll be taxed, as well as how to save money on taxes along the way.

Buy to let can provide a source of steady income as well as capital appreciation. However, there are several taxes to take into consideration that can impact the value of your BTL investment. This article will explain the key points.

Please remember that a mortgage is a loan secured against your home. your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.

Below are answers to five commonly asked questions about taxes on a Buy to Let property:

#1. What is the tax payable on rental income?

When you file your Self-Assessment tax return, any rent you receive from properties must be declared. How much tax you pay will depend on how much you earn and which tax bracket you are in. The standard ‘taxpayers rate’ is 20%, followed by 40% for the ‘higher rate’, and 45% for the ‘additional rate’ category. deductions can be made for certain allowable expenses, but many people are unaware of this fact. Allowable expenses for landlords include costs that can be deducted from your overall tax bill.

These may include:

  • Council tax
  • General repairs and maintenance
  • Insurance
  • Certain legal and professional fees

#2. What Stamp Duty tax is payable when I purchase a buy-to-let property?

The new law exempts first-time buyers from Stamp Duty on residential properties up to £500,000. However, if you’re looking to buy a property for investment purposes (i.e., a buy-to-let), you will still be subject to paying this tax. The amount of tax depends on the value of the property as follows:

  • 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

This stamp duty land tax applies to both a buy to let property and also to a second property that you may wish to purchase.

It’s worth noting that the amount of Stamp Duty paid will be subtracted from any capital gains made once sold.

#3. What Capital Gains Tax do I pay when selling a buy-to-let property?

When you sell a buy to let property for more than what you paid for it- after subtracting certain costs such as stamp duty and solicitor’s fees-you are making a profit (the “capital gain”.) The Government will charge you a tax on this gain. Although this may be the case, as an individual, you can be qualified to receive an annual allowance purely for capital items – separate from the general personal income tax allowance. Depending on the level of capital gain and on your level of earned income, the capital gain tax rate is either 18% of 28% for individuals.

Are you looking for ways to reduce your Capital Gains Tax?

The following are some easy ways to lower the amount of Capital Gains Tax (CGT) you’re responsible for:

  • Stamp Duty
  • Fees paid to Estate agent and solicitors, when you bought and also when you sold the property
  • Costs to advertise the sale of the property
  • Any losses incurred from selling a buy-to-let property in the past
  • Certain capital item expenditure, such as the cost of a loft extension

Depending on your personal circumstances you may be able to deduct these types of expenses from your capital gain. A qualified tax accountant will be able to work out all these things for you.

#4. Is there an Inheritance Tax on buy-to-let properties?

The amount of inheritance tax you will have to pay on a buy-to-let property depends on your individual 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%. These are generic guidance. Always seek professional advice when dealing with inheritance tax as it is a complex field.

 #5. Will my taxes decrease if I switch to a limited company?

Unfortunately, there is no straightforward answer to this question. It depends on various circumstances and factors. That said, it’s worth mentioning that with a limited company, you can treat mortgage interest payments as a business expense. This means the mortgage interest payment will reduce the gross rental revenue amount over which tax is charged.

Also, limited companies pays a fixed corporate rate of tax of 19%.

Individuals income tax rate depends on the level of income, and it can be 20% for basic rate taxpayers, 40% for higher rate, and 45% for additional rate taxpayers.

Capital gains allowances don’t apply to limited companies, so it might be less tax-efficient to sell a buy-to-let property. And filing corporation tax returns can be more complicated and time-consuming than doing a self-assessment form, even though corporate taxes are lower.

Although you may be able to gain some tax relief by transferring your buy-to-let property to a limited company, it could also trigger stamp duty charges and capital gains taxes. It’s a delicate balance that might prove fruitful, but you would need an expert opinion from qualified tax adviser to assess your specific situation.

Where can you find more help?

Tax is a specialist area. The information provided here is only general and not specific to any individual’s circumstances. It is an overview of regulations only, and it is not legal or tax advice. Your Mortgage Experts endeavors to remain accurate and error-free, but we cannot guarantee it, especially as tax regulation change regularly.

It is always recommended that you seek professional legal and tax advice before taking action.

If you need additional help with your Buy to Let mortgage, contact one of our knowledgeable mortgage advisors and call us on 02081541111 today.

Luca Bertolino

Mortgage Expert

Your Mortgage Experts is led by Luca Bertolino with 20 years experience in financial services and in the property market. Through Luca’s wealth of knowledge and expertise, Your Mortgage Experts have become a trusted adviser that clients have come to rely upon for all their mortgage and protection needs.

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