If you’re a property investor looking to purchase a buy-to-let, you’ll have various tax obligations to meet.
These liabilities can change depending on your business structure, so it’s important to know where you stand.
As with most areas of tax, there have been changes over the years regarding buy-to-let properties. If you’re unsure what you need to pay, this article will clear things up.
Income tax
If you make a profit from your buy-to-let property, and you own it personally rather than through a limited company, you’ll inevitably have to pay income tax. You will need to declare your income on a self-assessment tax return if you earn:
- £2,500 – £9,999 after allowable expenses
- £10,000 or more before allowable expenses.
Landlords have a £1,000 annual rental income allowance, but this won’t apply if you calculate your profits by deducting allowable expenses.
Your income tax liability will increase in line with the amount you earn every year. The current income tax rates are as follows:
| Tax band | Threshold | Tax rate |
| Personal allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 – £50,270 | 20% |
| Higher rate | £50,271 – £125,140 | 40% |
| Additional rate | £125,141 and over | 45% |
Capital gains tax
Because your buy-to-let won’t be your main residence, you’ll have to pay capital gains tax (CGT) on any profit you make if you sell.
Any gains over the annual allowance of £6,000 will be subject to CGT, with the rate increasing depending on your income tax band. Basic-rate taxpayers will have to pay 18% CGT on their gain, while higher earners will have to pay up to 28%.
Corporation tax
If you purchase your buy-to-let property through a limited company, you’ll pay corporation tax instead of income tax on your profits. So, rather than report your property earnings in a self-assessment tax return, you would do so on a corporation tax return.
As with most forms of tax, the rate you pay will increase in line with your annual profits.
If your company has an annual profit of £50,000 or less, you’ll only have to pay 19% corporation tax (which makes it more efficient than being self-employed).
But any profits between £50,000 and £250,000 will incur a 26.5% charge with marginal relief, and any profits over £250,000 will pay the flat 25% rate.
Bear in mind that you’ll need to pay income tax at the normal rates on any salary you take from the company, and at lower rates on any dividends you receive.
Stamp duty
When purchasing a buy-to-let property, you’ll also have to pay stamp duty land tax (if you’re in England or Northern Ireland), land transaction tax (Wales) or land and buildings transaction tax (Scotland).
The rates of stamp duty land tax for additional properties are dictated by the value of the property in question:
- 3% up to £250,000
- 8% up to £925,000
- 13% up to £1.5 million
- 15% on anything over £1.5m.
Rates for land transaction tax in Wales are as follows:
- 9% between £225,000 and £400,000
- 11.5% between £400,000 and £750,000
- 14% between £750,000 and £1.5m
- 16% on anything over £1.5m.
Land and buildings transaction tax in Scotland is as follows:
- 6% on anything less than £145,000
- 8% between £145,000 and £250,000
- 11% between £250,000 and £325,000
- 16% between £325,000 and £750,000
- 18% on anything over £750,000
Keeping a tax-efficient portfolio
As you can see, there are several tax obligations to meet as a buy-to-let landlord. But why let that get in the way of your entrepreneurial ambition?
We can take the stress out of your property business by managing your finances and tax liabilities. We’ve done it for countless clients over the years, and we can for you too.
Get in touch to discuss your buy-to-let property business.