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What is a Buy to Let Mortgages?
A buy to let mortgage is the type of mortgage deal you will need if you want to buy a property and rent it out instead of living in it yourself.
Buy to Let mortgages are similar to standard mortgages, but they need a larger deposit and a tenant in the property. If you do not have a tenant, then you will need to prove to the lender that your property is suitable to rent out. Usually lenders require the rental income to be between 125-145% of the monthly mortgage payments. Many lenders will also want to see evidence of your employment/self-employment.
Do you pay Stamp Duty Land Tax on a buy to let property?
You may be eligible to pay Stamp Duty if you buy a property above a certain price band. The Stamp Duty will vary depending on where in the UK you are purchasing your property.
In England and Northern Ireland you will pay Stamp Duty Land Tax and the current rates of stamp duty are as follows:
- 3% tax on the first £125,000
- 5% on the portion up to £250,000
- 8% on the portion up to £925,000
- 13% on the portion up to £1.5 million
- 15% on everything over that.
In Scotland you’ll pay Land and Buildings Transaction Tax, and the current rates are:
- 4% tax on the first £145,000
- 6% on the portion up to £250,000
- 9% on the portion up to £325,000
- 14% on the portion up to £750,000
- 16% on everything over that.
In Wales you’ll pay Land Transaction Tax, and the current rates are:
- 3% tax on the first £180,000
- 6.5% on the portion up to £250,000
- 8% on the portion up to £400,000
- 10.5% on the portion up to £750,000
- 13% on the portion up to £1,500,000
- 15% on everything over that.
If you are buying a second property that is not your main residence, you will be charged these new rates. This includes holiday rentals and buying a property for your children.
Stamp duty has to be paid within 14 days of completion of the property purchase and is deductible from any capital gains you make when the property is sold.
Will I pay Capital Gains Tax on a buy to let property?
If you sell you Buy to Let at a profit then you will need to pay Capital Gains tax, because you are gaining capital (ie. profit) after deduction of expenses like stamp duty, estate agent and legal fees.
As an individual person, you are eligible for an annual allowance to offset any capital gains any gain. In the 2019/20 tax year, this allowance is £12,000.
If your gains are more than your £12,000 allowance, you will need to pay Capital gains tax at a rate of either 18% or 28% on any profit over £12,000.
What can I do to reduce my CGT liability?
You can decrease the amount of your Capital Gains Tax (CGT) liability in several ways, by recording your expenses due to the following:
- Stamp duty
- Legal Fees
- Estate agent fees
- Any losses you made on the sale of a buy to let property in previous tax years
Money you have spent renovating and redecorating the property
These expenses can be deducted from your capital gain. Additionally, you can be eligible for other forms of tax relief, for example if the property you are selling is your home instead of an investment property. certain tax reliefs available. For example if the property was previously your main residence, the gain may be reduced.
Do I Have to pay tax on the rent I receive from my buy to let property?
The rent you receive is your income, hence it is taxable and you need to declare it on your Self assessment. The tax on your income is charged in according to your income tax banding (20% for basic rate taxpayers, 40% for higher rate, and 45% for additional rate).
You can minimise the amount of tax you pay by deducting ‘allowable expenses’ from your taxable rental income. We have made a short list of allowable expenses below:
- Interest on buy to let mortgages and other finance charges
Council tax and landlord insurance - Ground rent where applicable
- Property repairs and maintenance
- Estate agent fees
- Advertising costs
- Tenancy Deposit scheme costs
The government has announced new rules for tax relief on interest payments from April 2017 which restrict the tax relief given on interest payments. The restriction is being phased in over 4 years and from April 2020 only give basic rate tax relief will be given.
An example of how the new rules could affect you
- House is bought for £300,000
- 80% mortgage is taken for £240,000
- Mortgage interest assumed at 4.5% annual mortgage interest is £10,800
- Rental yield is assumed at 5%, annual rent is £15,000
Basic rate taxpayer
Apparently, basic rate tax payers will not pay any more tax under the new rules, but there is more to it than that. Under the new rules, rental income from Buy to Let properties will be calculated differently. Rental income will now be the ‘gross’ amount, which the amount before the deduction of mortgage payments and expenses.
Higher rate taxpayer
Higher rate taxpayers will also be affected by the new rules. During 2020, the average higher rate tax payer will pay £2,160 more in tax.
Is using a limited company better for tax?
In some cases, it is better to build your Buy to Let property portfolio under a limited company instead of under your personal name. Limited companies are not affected by the new mortgage interest relief restrictions that were announced by the government in 2017, because mortgage interest payments for limited companies are designated as business expenses and fully deductible from the rental income.
All UK companies pay Corporation Tax at a fixed rate irrespective of the size of the profits. Currently it is 17% (2020). This makes it a much more viable option than owning the property personally.
If the money is taken out of the limited company as a dividend, then from April 2018 only the first £2,000 of dividend income is tax free. Any dividends taken out in excess of this will either be charged at 7.5% for a basic rate taxpayer, 32.5% for a higher rate taxpayer, or 38.1% for an additional higher rate taxpayer. This tax is after the corporation tax at 19% has been paid.
However, limited companies have some disadvantages. We have laid them out below.
The money could be taken as wages, but then the company would have to organise PAYE and pay Employers National Insurance contributions on the wages paid. Usually this is out more expensive than paying dividends.
Another disadvantage is that limited companies will not be able to take advantage of the annual allowance of £11,700 against capital gains, because they will have to pay the Corporation tax on any profit.
Companies will also need to prepare accounts and file them with company’s house and prepare and file corporation tax returns.
Interest rates charged on mortgages to companies are usually higher than to individuals.
Transferring a current buy to let property into a limited company might mean that you will have to pay stamp duty and capital gains tax charges.
Do you pay inheritance tax on a buy to let property?
The short answer is yes. The amount of inheritance tax will vary from case to case.
Here is a worked out example.
Yes, Inheritance Tax is payable on buy to let properties but the amount changes depending on your circumstances. A buy to let property that you own will form part of your estate for Inheritance Tax purposes.
It works like this:
If you have bought a Buy to Let property and are the landlord, then you will be liable to Inheritance Tax if the value of your estate exceeds £325,000. Anything above this amount is taxed at 40%.
If you are in a marriage or civil partnership, then you each have a threshold of £325,000 so the inheritance tax kicks in at £650,000. Again, anything above this amount is taxed at 40%
This is a very simplified version of events. To get an accurate idea of what your inheritance tax would be, the best thing to do would be to discuss your circumstances with a professional.