Find out the latest tax rules and how they will affect you
With this guide prepared for Promise Money by Accord Mortgages
Property taxes can be complex and amongst all of the other things that landlords need to consider. This includes finding suitable tenants and ensuring the property meets all the necessary standards. It’s easy to forget about tax.
That’s where this guide comes in. We’ll explain the main things you need to know about taxes associated with your Buy to Let property.
This guide is correct at the time of publication and we recommend landlords consult an accountant or tax adviser about their personal situation.
When you purchase land or property you will likely pay stamp duty land tax (SDLT) in England. Land and Buildings Transaction Tax (LBTT) in Scotland or Land Transaction Tax (LTT) in Wales. The rate you pay will depend on the price you pay for the property, excluding any carpets, curtains and free standing furniture etc. at the market value (the amount that you would pay for these on the open market and not an artificially constructed value).
From 1 April 2016, the rate of stamp duty was increased by 3% on second properties which may be a second home or a buy to let property.
Companies also pay SDLT on all property purchases.
HMRC provide a calculator to enable taxpayers to establish the amount of SDLT payable:
Stamp Duty Land Tax Calculator
Stamp duty has to be paid within 14 days of completion of the transaction alongside the submission of a SDLT return or penalties and/or interest may become due.
It’s also important to note that Stamp Duty Land Tax Rates have changed in September 2022 in a way to tackle inflation. To read the full guide, click here.
Accruals vs cash basis
Rental accounts are relatively easy to prepare for a single property, although you may still prefer the reassurance of using an accountant to look after your affairs.
Previously, both income and cost had to be included in rental property accounts on an “accrued” basis. For example, in the tax period, they were incurred rather than when they were actually paid or received. Since 6 April 2017, the default is the “cash” basis for those with rental income below £150,000 pa. This is usually much simpler as it means that you include receipts and payments when the money moves and ignore anything that is still owed. If this is your only business income then it is easier to manage as you can just keep a separate bank account for your property transactions.
You can still opt to use the accruals basis if you prefer.
Individual landlords used to be able to claim all of your mortgage interest as a deductible cost against residential property income. However, this is no longer the case due to the Finance Act 2015 coming fully into force in the tax year 2020–21 onward. You now have to pay income tax on all rental income after allowable expenses have been deducted (see below). You are then able to claim a tax credit worth the equivalent of the basic rate of interest (currently 20%) of the annual mortgage interest you have paid via your tax return. (This tax credit is fixed at the basic rate regardless of the rate at which you pay income tax).
Landlords are able to deduct certain expenses from their rental income in order to reduce your tax bill.
Residential landlords can typically claim:
- Buildings insurance (not contents unless it is a furnished property)
- Light and heat
- Rent and ground rent
- Service charges
- Council tax while vacant
- Repairs and maintenance (not improvements which are claimed against capital gains tax)
- Small tools
- Legal e.g. preparation of rental contracts (legal costs on purchase and sale are claimed against capital gains tax, profit and loss on obtaining finance is not allowed as a finance cost)
- Accountancy fees
- Debt collection fees
- Other insurances (such as rental protection insurance)
- Letting agents’ fees
- Travel costs associated with your rental business
- Repairs or improvements?
- Repairs and improvements are usually both allowable costs but it is an important distinction as tax relief is claimed in one of two ways depending on whether building work is repairing or replacing pre-existing materials or whether it is an improvement.
- Repairs and maintenance costs can be deducted to reduce your income tax and usually include:
- Painting and decorating
- Re-pointing existing brickwork
- Damp or rot treatment
- Repairs to existing equipment, windows, doors, etc.
- Replacing a roof
- Like for Like replacements (example, if you replace a garden shed worth £500 with one worth £1000, you can only claim income tax relief on £500 – the value of the shed you have replaced.)
- Capital items are work which improves the property such as an extension. These costs can be claimed to reduce your capital gains tax when you come to sell the property.
- Sometimes it is hard to tell if an item is a replacement or an improvement so, if you’re unsure, do take tax advice.
- Furniture and fittings
- Since 6 April 2016, it is only possible to claim the actual cost of repairing or replacing these items. This means that you should keep your receipts etc. There is no longer a 10% wear and tear allowance on furnishings and appliances.
- Capital gains tax
- When the time comes to sell, hopefully your property will have increased in value. Unlike selling your main home, this increase in value is taxable as a capital gain.
- The good news is that you can claim the costs of purchasing, selling and improving the property.
If the property was your main residence at any time then there may be reliefs available. You may also qualify for up to £40,000 letting relief per owner.
Letting relief is complex and if you wish to see whether you qualify for this relief, your best option is to seek advice from a tax adviser.
An example taxable gain is below:
- Selling Price £250,000
- Less Purchase Price (£175,000)
- Less Purchase Costs (e.g. professional fees) (£5,000)
- Less any capital improvements (£10,000)
- Less any selling costs (e.g. professional and advertising fees) (£1,750)
- Capital Gain (£58,250)
- Less any tax reliefs (e.g. capital losses) (£750)
- Net taxable gain £57,500
There is an annual capital gains allowance for each individual owner (currently £12,570) to offset net gains/losses in the year of disposal. Everything above this allowance is currently taxed at 18% or 28% for residential property depending on your normal income tax rate.
If you are thinking of selling a property that has significantly increased in price then it may be worth taking individual tax advice early in the process and definitely before the sale itself as there may be actions that can be taken in order to minimise your tax burden.
Landlords now have 60 days to report and pay capital gains tax when selling a property (an increase by 30 days which was announced in October 2021). VAT (Value Added Tax) and Making Tax Digital (MTD)
New legislation was introduced in April 2022 which means any VAT registered businesses with turnover below £85,000 must now file their VAT return digitally which means using special accounting software. Visit https://www.gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-vat for more details.
Differences for companies
If you decide to use a limited company to hold your property portfolio, you will pay tax on profits as corporation tax. The standard rate is currently 19% on all profits. The standard rate of corporation tax will increase from April 2023 to 25% (for those companies with profits in excess of £250,000). For companies with profits between £50,000 and £250,000 there will be a marginal rate and for companies with profits under £50,000, the 19% rate will continue.
Since 1 April 2016, the Annual Tax on Enveloped Dwellings (ATED) regime has applied to all UK residential properties worth over £500,000 owned by companies, partnerships with one or more corporate members, and collective investment vehicles – all of which are referred to as Non-Natural Persons (NNPs). The rate varies depending upon the value of the residential properties from a minimum of £3,800 to a maximum of £244,750 per annum.
For more information about the regime see Annual Tax on Enveloped Dwellings – GOV.UK.
You will potentially have to pay further tax/NIC when you want to take the profits out of the company as salary (PAYE/National Insurance) or dividends (dividend tax). From April 2022, the NIC rate was increased by 1.25% .
There is no annual allowance for a company’s capital gains on sale.
Companies can claim tax relief in full for the costs of finance (such as mortgage interest) and there can be tax relief for capital assets employed in the business such as vehicles, office furniture and equipment etc in the form of capital allowances.
Using a limited company may give you opportunities for tax planning but there will also be higher ongoing administration and accountancy costs. There are also different inheritance tax rules when transferring shares in a property company rather than transferring the properties themselves.
Differences for trusts
There may be Inheritance Tax (IHT) advantages if your property is held in a trust. If you are thinking of using a limited company or a trust then it is worth taking professional advice.
This guide is intended as a brief overview of the main ways that your residential property investment will be taxed and is correct at the time of publication. Next steps for landlords might include:
- Ensure you understand the impact on your business and income now and in the future.
- Take a look at the suggested sources throughout the guide.
- Consider appointing an accountant or tax adviser if you don’t already have one. The more complex your income and the larger your portfolio, the more likely this is to be beneficial. ICAEW or ACCA are great websites for searching for accountants near you.
- Be aware that according to your situation, other taxes may apply and there are special rules for non-UK residents.
Date checked: April 2022
The information in this guide is correct as of the date on the document.
Promise Money does not accept any responsibility for how the guide is used.
If we become aware that the advice is out of date, we will remove the guide from our site. It is the responsibility of the user to ensure the guide remains correct as and when it is used or shared.
This is a guide to BTL tax changes and is not intended to reflect Promise Money’s BTL offering. If you’d like details of our BTL proposition, please contact our sales team or visit our website.
Talk to a Promise Money adviser for more details
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