Buy to let tax implications for UK properties and owners
We receive many enquiries from prospective and current property landlords confused by the 2017 changes in buy-to-let tax laws.
We understand the importance of understanding all aspects of the buy-to-let tax rules, whether you are looking to buy a new property or already have an extensive portfolio.
Tax changes for buy-to-let
The UK government introduced new rules in 2015 for second and buy-to-let property owners to ease pressure on the housing market. You can no longer claim 25% mortgage interest tax relief. The Capital Gains Tax allowance was increased from £11,000.700 to £12,000 for basic-rate landlords. Stamp duty also increases.
For more information, see below.
Stamp duty increases for second homes.
All buy-to-let and second properties, which are residential properties that are not considered primary residences, have an additional 3% stamp duties surcharge as of April 2016.
If you bought a property to buy-to-let for £120,000 before April 2016, you would not have to pay a stamp duty surcharge. If you purchased a property of the same value as now, you would be charged a surcharge of £3,600.
Some exemptions from this stamp duty surcharge are:
- Property dwellings valued at less than £40,000
- Houseboats, houseboats and mobile homes (regardless of their intended use or value)
- First-time buyers buying a buy-to-let property will be charged standard home moving rates.
Tax relief for buy-to-let mortgage interests to be phased out in 2021
Before April 2017, landlords who owned a buy-to-let property could claim tax relief from HMRC. They were allowed to deduct all mortgage interest payments from rental income. This was a significant tax saving, as most buy-to-let mortgages are interest-only.
The government has been gradually reducing the amount of tax relief for buy-to-let mortgage interests that can be deducted from your income since the 2017/18 tax year.
In 2017/18, you could claim 75%. You can still claim 25% in 2019/20, but it will be replaced entirely by 20% in 2020/21 (the equivalent to the basic tax rate) that you apply to your final tax bill.
If you have paid £7,200 mortgage interest on a buy-to-let property, you would have deducted this entire amount from your gross rental income before 2017/18. To reduce your tax owing, you can only use 20% (PS1,440) of this amount starting in 2020/21.
Send us an enquiry to learn more about buy-to-let loans.
We can arrange for a representative from our team to meet with you.
Are the changes in buy-to-let mortgage taxes affecting affordability assessments for BTL property?
Yes. The Prudential Regulation Authority (PRA), established in 2017, introduced new guidelines that immediately affected affordability criteria.
- For rental income amounts, stricter use of interest rates.’
- A full review of the applicant’s tax situation is done as part of an affordability assessment.
- Portfolios with more than four properties are subject to greater scrutiny
Most lenders wanted to see the rental income from a property earning at least 125% of its mortgage interest payments before the changes. This is also known as the “stress rate” or the Interest Coverage Ratio.
Lenders used to be able to lower stress rates, which could have caused problems in some instances if rents were stopped for a prolonged period. Most lenders use the new PRA regulations, which stipulate that a minimum stress rate must be 125% and a 5.5% interest rate.
To accommodate high-rate taxpayers with higher tax liabilities, some lenders will use rates up to 145% while others go up to 160%.
If you want to learn more about how lenders assess affordability in light of the BTL tax change, enquire here.
What could the tax on income from buy-to-let be like for landlords?
This example will help you understand tax changes’ impact on buy-to-let income.
Tax changes for buy-to-let: Example
Before introducing all the tax rules for buy-to-let, if you owned a BTL property with an annual rental income of £10,000 and paid mortgage interest at £4,500, you would declare the difference – £5,500.
The basic rate taxpayer would be subject to £1,100 tax (20%), while the higher rate taxpayer would have to pay £2,200 (40%).
The basic rate taxpayers will not be affected if we apply the same examples but change to 2020/21, which will only allow for a 20% tax credit. A higher rate taxpayer will still be subject to £3,100 ((£10,000 x 40%) – (£4,500 x 20 %)).).
As you can see, the removal of tax relief on mortgage interest does impact the profits of a landlord who is a high-rate taxpayer.
This site has a lot of information. Let us help you.
We can help you to find a specialist in buy-to-let taxes by enquiring.
How does a buy-to-let tax calculator work?
UK advisors and lenders regularly use a buy-to-let tax calculator to calculate how much tax will be on rental income from buy-to-let properties.
This calculator can help determine how the new buy-to-let taxes could impact your rental income. These tools aren’t just for mortgage providers.
HMRC also offers a buy-to-let calculator that provides an overview of tax treatment for rental properties.
What is a Buy-to-Let Tax Relief Calculator?
Based on the new rules for buy-to-let properties, a buy-to-let tax relief calculator will calculate how much tax relief your mortgage interest can get.
You should talk to an expert broker in buy-to-let.
We can provide you with a top-quality service tailored to your specific needs. We have access to the most knowledgeable buy-to-let brokers.
- Access to all markets
- Establish good relationships with lenders
- Are OMA-accredited advisors
- You have completed the 12-module LIBF-accredited training course
Talk to a specialist in buy-to-let
We are available to answer your questions or to provide mortgage advice free of charge. All of our brokers are regulated by the financial conduct authority.
Relax, and let us find the best broker for your situation. – There is no charge and no obligation.
FAQS:
What capital gains tax do I have to pay on the sale of a buy-to-let property
Yes, it’s possible. Capital Gains Tax (CGT), which may be payable on any profit from the sale of property that is not your main residence, can be applied. If there is no profit, then CGT does not apply.
Is it possible to avoid capital gains tax when I buy-to-let property
Although you should not “avoid” any tax you are liable for (this would be classified as buy-to-let tax avoidance), you can reduce the amount due on a BTL property.
HMRC offers an allowance (currently £12,000 in 2019/2020), where profits above this amount are exempt from tax. All selling and buying fees can be deducted from any profit made on the buy-to-let property and any significant renovations (such as replacing windows).
If you make more than the allowance, the amount will be added to your next tax return. All capital gains tax on buy-to-let properties becomes due in April 2020.
Limited company buy-to-let mortgages can be used to manage your property portfolio. The company will pay corporation tax instead of CGT.
Send us an Enquiry to learn more about buy-to-let mortgages. We will contact you with the expert.
Do you think it is better to manage your property portfolio through a limited corporation or keep everything in your personal name?
This is not a case of ‘one size fits all. In certain aspects, limited businesses may have better tax benefits than individuals when they own a portfolio of buy-to-let properties.
There is no way to know if the tax benefits you have now will be available in the future. A limited company requires more administrative work than a sole proprietorship.
It can be difficult to transfer an existing property portfolio from personal to a company name. You will need professional help to make it happen without additional stamp duty or capital gains taxes.
Talk to a specialist to find the best option for you.
What if I decide to sell my buy-to-let portfolio and qualify for entrepreneur relief?
Entrepreneur relief provides additional tax relief for those who have recently sold a business. It allows you to pay 10% fewer capital gains tax on your profits.
It is generally only available to people involved in a trade and doesn’t usually apply to property portfolios.
Who pays the council tax for a buy-to-let property?
If you are a landlord of a buy-to-let property with its own council tax banding, it would typically be the tenants who would pay the council taxes.
It is usually only houses of multiple occupations (HMOs), where many tenants are living under the same roof that the landlord would be responsible for the bill. The council tax on buy-to-let properties would be included in the rental payment. This can be considered a tax-deductible expense.
The following are some other expenses that you can deduct from your tax bill for running and maintaining your buy-to-let property.
- Utilities (water, gas, electric)
- Contents insurance
- Maintenance (gardening, cleaning)
- Ground rent
- Fees for a letting agent
Are there differences in tax rules between different countries within the UK
Yes, stamp duty can vary. England and Northern Ireland have the same stamp duty rates. The Land Transaction Tax (LTT), the stamp duty in Wales, has a slightly higher threshold of £180,000. Although the standard rates are somewhat different, the surcharge of 3% for second properties is the same.
Buy-to-let landlords in Scotland are subject to Land and Buildings Transaction Tax ( LBTT ). It has a slightly higher threshold than Wales at £145,000, but it charges the exact 3% surcharge as the rest of the UK for buy-to-let properties.
You can also obtain a second mortgage from the UK if you are a resident of another country. The additional 3% stamp tax surcharge will apply regardless of your residency status.