Buy to Let Taxation

Buy to Let Fact Sheet

This guide is designed to provide an overview of the considerations when purchasing a BTL property, this is from basic  BTL rules to taxation of properties. However, this is a guide and any formal advice on taxation should be sought from a qualified tax advisor.

BTL Overview

• Buy to Let mortgages often require a minimum of 25% deposit
• Often the mortgage affordability is based on the rental income of the property at a stressed-interest rate between 5-6% and 125% coverage of the mortgage payment
• Majority of lenders require a minimum annual income in the region of £25,000-£30,000
• Some lenders are able to use excess income to achieve a larger loan if the rental is not sufficient at the stressed rate, this is called top-slicing 
• Majority of lenders require tenants to be on one Assured Shorthold Tenancy Agreement (AST) over 6 or 12 months
• Buy to let mortgages are generally not regulated by Financial Conduct Authority (FCA), this is because they are treated as an investment or business transaction and therefore the borrowers are more educated or financial-savvy. If there is a family member or you plan to live in a portion of the property these are regulated and often not treated as a buy to let but a residential mortgage 

Tax on Buy to Let Rental Income

There are tax considerations on the rental income being received from rental properties.

• Rent must be declared as part of your self assessment 
• Rental is charged depending on your personal tax rate ie. 20% lower-rate taxpayers or 40% higher-rate taxpayers
• Tax is charged at the Gross Rental income e.g. if rental is £1000 per month > £12,000 per annum, the taxable amount is the % of your personal tax position. E.g. if you are at a lower rate, it’s 20% which is £2400 or higher rate £4800.

You can offset expenses of running your investments or buy to let property as a tax reduction of the gross amount above, listed below are the expenses you can offset:

• Repairs and maintenance of the property
• Council tax or energy costs you have paid
• Legal or professional fees e.g. letting agents costs
• insurances
• Mortgage interest payments; however these are restricted to 20% maximum relief regardless of your tax rate

Capital Gains Tax

There are tax considerations when selling a property, below explains the rates and taxes you pay when selling an investment or buy to let property.

• Tax Allowance is £12,000
• 18% for lower-rate taxpayers and 28% for higher-rate taxpayers

There are costs or expenses you can offset some of your Capital Gains Tax:

• A loss made on the sale of a buy to let property in previous tax years
• Solicitor & Estate Agent fees
• Stamp duty
• Any previous losses on property in prior tax years

There are other tax reliefs to be considered, for example if the property was previously your main residence. Speak to a tax expert for advice. 

BTL Stamp Duty Rates

Please see rates payable for second property stamp duty:

• 3% tax on the first £125,000
• 5% on the portion up to £250,000
• 8% on the portion up to £925,000
• 13% on the portion up to £1.5 million
• 15% on everything over that

These rates are applicable in England and NI

Ltd Company BTLs

Purchasing an investment or buy to let property in a Limited Company can have advantages and disadvantages; however the suitability of this will depend on your individual circumstances and you should always seek advice from a qualified tax expert.

Advantages

• Corporation tax rates are lower than income tax rates, especially for higher rate taxpayers. Corporation tax is payable on profits at 19% whereas rental on a personal taxation is 20% or 40% depending on tax rate band.
• Properties owned in a limited company have limited liability as are separate legal entities providing a level of protection to the owners
• Ltd companies can provide more options for owners when future tax planning 
• Any properties sold and a gain made are not subject to Capital Gains Tax, these are simply treated as a income/gain into the business

Disadvantages

• Although there are options for mortgage limited company buy to lets, there are fewer option than owned in personal name
• There are increased accounting and management costs of the reporting 
• Personal tax liability is still paid on any income paid-out and derived from the Ltd company
• Although capital gains is not paid, as a business there is no ‘allowance’ from gains/profits made

Our Buy to Let Mortgage Repayment Calculator can give you an idea of how to budget for mortgage repayments.