Tax on buy to let properties.
1) Stamp Duty
The 0% stamp duty rate will be valid until June 30 2021 for properties under £500,000 and from July 1 until September 30 2021 for properties under £250,000. However, if you are buying a buy-to-let property or a second home, you will need to pay an additional 3% tax on top of the standard stamp duty rate.
The following rates apply to rental and second home purchases up to June 30 2021.
| Property price | Stamp duty rate |
| £0 – £500,000 | 3% |
| £500,001 – £925,000 | 8% |
| £925,001 – £1.5m | 13% |
| £1.5m + | 15% |
From 1 October 2021, normal rates will apply for everyone.
| Property price | Stamp duty rate |
| £0 – £250,000 | 3% |
| £250,001 – £925,000 | 8% |
| £925,001 – £1.5m | 13% |
| £1.5m + | 15% |
2) Capital Gains Tax on buy to let property.
If you sell the property for more than what you paid for it, after deducting the costs such as stamp duty and agent / solisitors fees. You make a profit (capital gain), so the tax applies.
What You Can Do To Reduce Your CGT
As an individual you get an annual allowance of £12,300 to set against any gain
There are legal ways to reduce the amount of Capital Gains Tax (CGT) payable.
• Loss from the sale of buy to let properties in previous tax years
• Legal fees
• Estate agent fees
• Advertising costs
• Stamp duty
• Any expenses for “capital” items
Certain tax reliefs are also available. For example, if the property was previously your primary residence, your profit for tax purpuses may be reduced.
Tax should be paid on the profit of the sale of the property within 30 days of the date the property is sold.
3) Tax on the rental income
You need to declare the rent you receive on your tax return. Your income is taxed according to the income tax range (20% for taxpayers at the base rate, 40% or 45% at the higher rate).
However, you can reduce the tax you have to pay by deducting certain “eligible expenses” from your taxable rental income.
Allowable expenses:
• Council tax, insurance, land rent, etc.
• Renovation and maintenance of property – however major improvements such as loft convertions, etc. are not deductible for income tax. They will be counted to reduce the Capital Gains Tax when the property is sold.
• Legal, management and other professional fees such as the cost of estate agents.
• Direct costs such as phone and advertising for new tenants, travel costs.
• Other expenses, including building insurance
Is it more profitable in terms of taxes to open a company?
Depends on a number of factors. How many properties are we talking about, how soon do you plan to receive income from the sale, individual circumstances.
Companies are not subject to the new limit on mortgage interest, which came into effect in April 2017. Morrgage interest for companies is classified as a business expense and fully deductible against income.
Companies pay Corporation tax at the fixed rate regardless of their profits. The rate is currently 19%. Compared to 40% for higher rate tax payers and 45% for additional higher rate taxpayers this makes the tax rate very attractive
The rules will change after April 2023, for companies with profit over £ 50,000 the Corporation tax rate will be 25%. However, companies earning between £ 50,000 and £ 250,000 will be eligible for tax relief, and only those earning over £ 250,000 will have to pay the full 25% tax rate.
How to withdraw money from your company. If the money is withdrawn from the company as dividends, then only the first £ 2,000 of dividend income is tax-free. Any dividends received in excess of this will be charged at 7.5% for a taxpayer with a base rate of 32.5% for a taxpayer with a higher rate, or 38.1% for a taxpayer with an additional higher rate. This tax is after the corporation tax at 19% has been paid.
The money can be taken as a wage, but the company must register as an employer and pay taxes on the salary. This is usually (in most cases) more expensive than paying dividends.
Companies also have to prepare annual reports and file tax returns, which can be onerous.
The interest rates charged on mortgages for companies are always higher than for individuals, so it is necessary to compare the amount of the rates with the tax consequences.
If you are planning to share the profits with your family, it is worth thinking about who the company will belong to when forming a company, perhaps it is worth adding the owner’s wife / husband, adult children to optimise tax.
Transferring a current buy to let property into a limited company can incur Stamp Duty and Capital Gains Tax, therefore advice should be sought prior to making such a transaction.
Due to the complications in this area, it is important that you seek professional tax advice.