Landlords and Property

Five Important Tax Issues to Consider When Purchasing a Buy-To-Let Property


By Wisteria Accountants

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Purchasing a buy-to-let property can be a wise investment, but there are a number of tax implications you should consider before dipping your toe in the market.

The rules governing buy to-let properties have changed a lot in the last few years, with less tax relief for landlords and stricter regulations for overseas investors.

So whether you’re new to the property game or you’re a seasoned investor looking to broaden your portfolio, it’s worth doing a little homework before signing on the dotted line.

To help you make up your mind, we’ve compiled a list of five important tax issues that you should consider when purchasing a buy-to-let property.

1. Capital Gains Tax

If you’re planning to buy a rental property, one significant tax issue you need to keep in mind is Capital Gains Tax.

Capital Gains Tax (CGT) is the tax you pay on any profits you make on the sale of an asset over and above your annual CGT allowance (currently £6,000).

So if you’re looking to flip your property a little further down the line, CGT can soon eat into your profits.

Capital Gains Tax is charged at 28% for higher-rate taxpayers and 18% for basic-rate taxpayers.

If you’re paying basic rate tax, it’s also worth remembering that any profit you make after CGT will be added to your income for the year, which could push you into a higher tax bracket.

2. Stamp Duty

Another tax issue to be aware of is Stamp Duty, or to give it its full name, Stamp Duty Land Tax (SDLT).

SDLT rates vary depending on the purchase price of a property, starting at zero for a flat or house worth up to £250,000, and rising to as much as 12% for a residence of £1.5 million or more.

If you’re thinking of entering the rental market, it’s important to note that these rates only apply to your main place of residence.

Any additional properties you purchase (such as a buy-to-let property) will be subject to a further 3% SDLT.

It might not sound like much, but that equates to a further £9,000 on a £300,000 property, so be sure to factor that in when you’re crunching the numbers.

3. Income Tax

One thing prospective landlords often forget when they’re setting their budget is income tax.

Any profits you make from rental income after tax allowances, relief or allowable expenses, will be subject to income tax.

So, depending on your financial situation, you’ll pay income tax on any net rental income you receive at the basic rate of 20%, the higher rate of 40%, or the additional rate of 45%.

If you’re thinking about entering the buy-to-let market to earn a little extra cash, it’s worth remembering that the additional income you make from your rental property could put you in a higher tax band.

4. Mortgage Interest Tax relief

In recent years, the rules governing mortgage interest tax relief have changed dramatically, and if you’re thinking of getting into the buy-to-let market, it’s something to bear in mind.

In the past, landlords were able to deduct their mortgage interest and any additional finance costs from their rental income before calculating their tax liability, helping to reduce their overall tax bill.

Since 2017, this has gradually been phased out, and under new rules, landlords receive a 20% tax credit instead.

For private landlords paying tax at the higher or additional rate, the change in legislation put a big dent in their earnings, effectively doubling the amount they had to shell out in tax.

For basic-rate taxpayers too, the new laws are problematic, pushing some private landlords into a higher tax bracket.

There’s still profit to be made in the buy-to-let market, but margins are tighter than ever, so remember to take the recent rule changes into account before making a purchase.

5. Non-Resident Landlord Scheme

If you’re an overseas investor looking to purchase a buy-to-let property here in the UK, you’ll be subject to the Non-Resident Landlord Scheme.

This usually means you’ll be taxed at source, so when you rent out your property, your letting agent or tenants will have to pay tax on any rent owed to you, deducting it from your rental income at the basic rate (after allowing for any expenses they might have incurred).

They’ll provide you with a certificate at the end of the tax year, showing how much tax they’ve deducted in total.

It’s then up to you to declare your rental income and profits on your annual tax return.

Some potential agents and tenants may be put off by the extra steps involved in the scheme, and if you choose, you can apply to HMRC to pay tax on your gross rental income as part of your annual return instead.

Speak to the Experts

Purchasing a buy-to-let property and dealing with all the subsequent tax implications can seem daunting, but here at Wisteria, we can help.

Our team of tax specialists can advise you on the best investments, when to buy, and crucially, walk you through any tax issues, ensuring you tick all the right boxes and don’t pay a penny more in tax than you need to.

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