Buying a property in order to rent it out to tenants can be a good way to invest money. Whilst no investment is ever completely safe, some people prefer the idea of buy-to-lets and owning a physical property, rather than investing in the stock market.
That said, buy-to-lets aren’t quite so straightforward as putting your money into something and hoping for it to grow. Landlords have legal obligations they must comply with, such as ensuring the property is safe for their tenants. You may also need to pay different types of tax as a result of your buy-to-let property.
What tax do I need to pay on my buy-to let?
Buy-to-let landlords may need to pay tax:
when they purchase the property
on the profits they make from renting it out
when they sell the property
Paying tax when you buy a property to rent it out
Buying residential property in the UK sometimes incurs tax on the purchase price of the property. For buy-to-lets and additional properties, there is sometimes an extra charge to pay on top of this. The kind and rate of tax depends on where the property is.
If you buy an additional property (such as a buy-to-let), you’ll pay an additional 3% on top of the Stamp Duty incurred on the sale. Use HMRC’s SDLT calculator. If you’re buying a property through a limited company, you’ll have to pay the additional supplement, even if you don’t already own a residential property.
Land and Buildings Transaction Tax (LBTT), and the Additional Dwelling Supplement (ADS)
If you buy an additional property costing more than £40,000 in Scotland, you’ll need to pay an additional 4% (called the Additional Dwelling Supplement) on top of the LBTT. If you’re buying a property through a limited company, you’ll have to pay the ADS, even if you don’t already own a residential property.
Land Transaction Tax (LTT)
Buying an additional property in Wales incurs an additional 3% of LTT on top of the normal rate of LTT on the sale. If you’re buying a property through a limited company, you’ll have to pay the additional supplement, even if you don’t already own a residential property.
Paying tax on the profit you make from renting out a buy-to-let property
As well as paying tax when you buy the property, you might also have to pay income tax if you earn a profit from renting it out.
The way that you pay other types of tax on the profits that you make depends on how you own the property.
If you own the property personally
Landlords who own their buy-to-let personally have a property allowance. This means that the first £1,000 of income you earn from the property in a tax year is tax free. Then:
If renting out the property makes you an income of between £1,000 and £2,500 a year, you should contact HMRC to discuss what you need to do.
You’ll need to submit a Self Assessment tax return if renting out the property brings you an income of £2,500 to £9,999 after allowable expenses, or £10,000 or more before allowable expenses.
Download our guide to Self Assessment to understand how and when to register, when to submit your return, and how to pay any resulting tax.
If the buy-to-let property is owned by a company, then any income made from renting it out is treated as part of the company’s income.
Watch our video to understand more about limited companies, how they operate, and how they are taxed.
Paying tax if you sell your buy-to-let property
If you sell a property that isn’t your home, such as a buy-to-let property, then you may have to pay Capital Gains Tax (CGT). CGT can be incurred on other things, too. Learn more about it in our guide.
What tax relief is available for buy-to-let landlords?
Business claim for allowable expenses in order to reduce their tax bill. This is because tax is charged on profit; what’s left from the income they receive after paying their costs.
Landlords can also claim for some allowable expenses in order to reduce their tax bill.
Allowable expenses for landlords who own the property personally
Before April 2017, landlords were able to deduct 100% of the interest from mortgage payments to reduce their tax bill.
Changes introduced in April 2020 mean that you can no longer deduct any buy-to-let mortgage expenses from your tax bill.
Fortunately there are other expenses which you can claim for though, as long as they are only incurred as a result of renting out the property. This might include:
making some repairs (such as replacing damaged items, rather than making home improvements)
the fees charged to you by the letting agent
the cost of landlord insurance
Allowable expenses when the property is owned through a company
The good news for limited companies who own buy-to-let properties is that they can still claim 100% of the interest on their mortgage payments. Learn more about allowable expenses for buy-to-let landlords on the HMRC website.
Should I set up a company for my buy-to-let property?
If you run a business buying property to let, then one type of business structure may be more tax efficient than another. Tax is a complex area though, and the best option for you depends on individual circumstances.
Subscribe to our newsletter to get accounting tips like this right to your inbox
About The Author
I'm an experienced and fully AAT and ACCA qualified accountant, who is enthusiastic about helping business owners succeed. I also love cooking and needlepoint (at different times!). Learn more about Beth.