Introduction
Tax is a vital factor to consider when analyzing any investment, Buy-to-Let properties are no exception. It is important that landlords and property investors stay up to date with any changes to tax legislation. While property tax can be complicated and difficult to understand, there are several recent changes that should be considered prior to any BTL investments.
The tax system in the UK is managed by the HMRC (His Majesty’s Revenue & Customs). Generally speaking taxes can be either direct or indirect. Direct taxes are paid directly to the government by taxpayers. Direct taxes are levied on an individual or business’ profits, income or assets.
Some common forms of direct taxes are
income tax,
National Insurance contributions,
Corporation Tax,
Capital Gains Tax or Inheritance Tax.
Indirect taxes, on the other hand, are paid on transactions or goods and services. These taxes are not paid directly to the government and are collected by an intermediary. The most common forms of indirect taxes are Value Added Tax, which is levied on most goods and services sold within the UK, Stamp Duty Land Tax (SDLT), which is paid when purchasing property in the UK and Excise Duties, which are levied on a handful of goods such as alcohol or tobacco.
There are specific taxes to consider when investing in a BTL property
Buy-to-Let Tax:
There are a number of different taxes imposed on Buy-to-Let property investments, each with their own rates and deductible expenses:
Income Tax:
Buy-to-Let properties are an attractive source of income for property investors. The income received on BTL properties usually comes in the form of rent received from tenants. The rental received should be declared in your annual tax return, if the property is owned in your personal name. The tax charged on rental income will be in accordance with your income tax banding (20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers). It is important to consider any changes to your income tax banding and how they will affect your taxable rental income. In addition to the income tax payable on BTL investments, there are several deductions that can be made from your rental income.
These deductions are referred to as “allowable expenses” and include the following:
● Council tax
● Insurance costs
● Maintenance and repair costs (excluding refurbishments or large improvements)
● Legal or letting fees
Stamp Duty Land Tax:
Stamp Duty Land Tax is payable within 14 days of completion of the purchase of a property and is usually paid directly to your solicitor. The amount of SDLT due will depend on the price of the property (and where it is located). The current threshold for SDLT on BTL properties sits at £250,000, although this will decrease to £125,000 from April of 2025. This means that any property purchased for more that £125,000 will be subject to SDLT as well as an additional 5% surcharge, which is levied on all BTL purchases. SDLT can contribute a significant amount to the purchase costs of a property, making them an important consideration for investors. The amount of SDLT paid can be deducted from the capital gains tax payable when the property is sold.
Corporation Tax:
Corporation tax is levied on Limited Companies and is an important consideration for BTL property investors who are purchasing their property in an Ltd. BTL property investors generally prefer to purchase their properties in an SPV (special purpose vehicle) as it allows them to isolate the risk of the investment and aggregate the expenses/income from a number of different properties held within the company.
The income earned by Limited Companies is taxable at the rate of Corporation Tax.
Profits over £250,000: 25% tax rate.
Profits under £50,000: 19% tax rate.
Profits between £50,000 - £250,000: Marginal Relief applies.
While tax can have a considerable impact on the profitability of a Buy-to-Let property investment, it is important for investors to ensure that they achieve full tax compliance. Non-compliance, or failure to pay your tax in full, can result in penalties and potential criminal prosecution. In order to ensure that you are fully compliant, you should ensure that you have a comprehensive understanding of the current tax changes.
In addition to this, by consulting with professionals (tax professionals or commercial mortgage broker), you can ensure that you are guided through the process. Moreover, by enlisting a skill tax or mortgage advisor you can ensure that you are optimizing your tax allowances and taking advantage of any tax benefits that might be available to you.
Conclusion
There are various different taxes payable by UK residents, from Capital Gains Tax to Income Tax. It is important to consider which taxes may be relevant to you in order to avoid non-compliance. While individuals can handle their own taxes, it is generally considered prudent to consult with your tax or mortgage professionals. Independent mortgage brokers and tax professionals can assist BTL property investors to fully understand how their investments are taxed and how to ensure that they remain tax compliant.
Comments