A buy-to-let property is a popular investment choice, but there are many different taxes associated with it that you may be subjected to.
Buy-to-let properties are subject to stamp duty, and the amount you pay is directly linked to the value of the property you buy. The stamp duty needs to be paid when the purchase is completed or within the first 30 days after completing.
The stamp duty amount is staggered according to the price of the property. The first £125,000 has 3% tax, with 5% on the portion up to £250,000 up to £925,000, then 13% on the amount up to £1.5 million and 12% on anything over that amount.
A supplement applies for all three taxes where an additional residential property is purchased for more than £40,000 (unless replacing the main residence). It is also payable by all Corporate purchasers. The rate is 3% of the total purchase price.
Should you inherit a buy-to-let property, you will need to pay inheritance tax if the property exceeds £325,000 minus any outstanding mortgage. However, if the landlord chooses to operate as part of a joint partnership with a married or civil partner, their inheritance threshold is combined and would only need to pay inheritance tax when the property value exceeds £650,000. Anything over these thresholds would be taxed at 40%.
Capital Gains Tax
If a profit is made when the property is sold and stamp duty and other fees have been deducted, then Capital Gains tax will be applied. Each person has an allowance to set against any gain, so if you gain over that amount in a single year, the Capital Gains tax will be applied at 18% or 28% depending on the income and capital gains that they have.
It is possible to reduce the amount of Capital Gains that you pay as estate agent fees, solicitor fees, stamp duty, property advertisement costs, capital expenditure and any losses made on previous buy-to-let property investments can all be deducted from the capital gain.
It is important that you declare any gains on your self assessment tax return. This means that the tax will be payable by the end of January the year following the tax year in which the property was sold.
This is all set to change in April 2019 when the tax will be required to have been paid with 30 days of the property sale.
Buy-To-Let Property Income Tax
The monthly rental payments that an investor receives are considered to be income, and that income is taxable. The rent that is received needs to be declared on your self assessment tax return and the tax on this income will be charged alongside your income tax banding,
There are what is known as ‘allowable expenses’ such as insurance, council tax, ground rents, professional property fees, property maintenance, finance charges, property expenses and buy-to-let mortgage interest. These expenses can be deducted from the taxable rental income, which will minimise the overall tax that is needed to be paid.
From the spring of 2017 the buy-to-let mortgage tax relief has been reduced which has meant that landlords that were paying higher or additional rate tax could claim tax relief at their highest rate. From April 2020 the tax relief can only be reclaimed at the basic rate of 20%.
Limited companies are not subject to the mortgage interest relief restrictions, and the interest can be classed as a business expense. Limited companies pay a fixed rate of 19% corporation tax, and this is set to be lowered in the future, making it a much more appealing tax rate.
Passing the money from the limited company to an individual becomes the tricky part. If taken as a dividend, income over the first £2000 will be taxed at 7.5% for basic rate payers, 32.5% for higher rate taxpayers or 38.1% for additional higher rate taxpayers. Taking the money as a salary means the company would have to pay Employers National Insurance, which could be costly.
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