Buy to Lets can be very lucrative for investors, particularly in certain high yields areas.
Many investors specially first-time investors are not aware that there are a number of buy-to-let taxes that prospective landlords must be aware of.
There are three main ones:
- Capital Gains Tax
- Income Tax
- Stamp Duty Land Tax
When selling your buy-to-let property, you will need to pay Capital Gains Tax (CGT) on any profit that takes you over your annual tax-free capital gains allowance of £12,300 and £6,150 for Trust’s.
The good news is that you can reduce your bill by offsetting costs like Stamp Duty and solicitor fees.
You will need to pay tax on your rental income; how much will depend on your income tax band, which are outlined below.
|Band||Taxable Income||Tax Rate|
|Personal allowance||Up to £12,500||0%|
|Basic rate||£12,501 to £50,000||20%|
|Higher rate||£50,001 to £150,000||40%|
|Additional rate||over £150,000||45%|
But, like CGT, you can offset your rental income against some expenses – these include letting agent fees, property maintenance and Council Tax.
MORTGAGE INTEREST TAX RELIEF
Previously, buy-to-let landlords could off-set 100% of their mortgage payments against their rental income (meaning a smaller income tax bill).
However, in 2017- New legislation came in that phased out this tax relief.
For the 2019-20 tax year, you can deduct 25% but from April 2020, you will not be able to deduct any mortgage costs from rental income.
Instead, buy-to-let landlords will receive a 20% tax credit, at the basic 20% rate, for their mortgage interest.
It is worth noting that this change in tax relief only impacts private landlords.
If a company owns the rental property, it will still be able to declare rental income after deducting the mortgage.
STAMP DUTY LAND TAX
In England and Northern Ireland, you usually pay Stamp Duty Land Tax (SDLT) on increasing portions of the property price above £125,000 when you buy residential property, for example, a house or flat.
There are different rules if you’re buying your first home and the purchase price is £500,000 or less.
Use the SDLT calculator to work out how much tax you’ll pay.
You must still send an SDLT return for transactions under £125,000 unless they’re exempt.
Rates on your first home
You can claim a discount (relief) so you do not pay any tax up to £300,000 and 5% on the portion from £300,001 to £500,000.
You’re eligible if:
- you, and anyone else you’re buying with, are first-time buyers
- you complete your purchase on or after 22 November 2017
If the price is over £500,000, you follow the rules for people who’ve bought a home before.
The amount you pay is based on the property price and there are five different rate bands. Buy-to-let properties incur an additional 3% tax.
Stamp duty is always paid on completion your solicitor will inform you of the exact amount, but before then please click on the link below which will take you to Calculate Stamp Duty accordingly:
Breakdown Rates if you’ve bought a home before:
|Up to £0 – £125,000||Zero||0.00|
|The next £125,000 (the portion from £125,001 – £250,000)||2%||0.00|
|The next £675,000 (the portion from £250,001 – £925,000)||5%||0.00|
|The next £575,00 (the portion from £925,001 – £1,500,000)||10%||0.00|
|The remaining amount ( The portion above £1,500,001)+||12%||0.00|
*Opulence Invest do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction*.