Do I have to pay tax on my buy-to-let investment?

UK buy-to-let property is one of the strongest asset classes available to investors, and it is no surprise that it is such a popular option. But with profit comes tax, and buy-to-let investment is no exception to this rule.

Tax is one of the most important considerations when investing in buy-to-let, and there are four main types which investors should be aware of before purchasing their next buy-to-let property:

  • Income Tax

    Money earned from your investment must be declared to HMRC and the regular rates of income tax (20%, 40%, or 45%) must be paid.

  • Stamp Duty Land Tax

    A tiered tax which is payable on all property transactions in England, Wales, and Northern Ireland (with a higher level payable on buy-to-let or second homes).

  • Capital Gains Tax

    If you sell a property not registered as your main residence, then the profit from the sale will be taxed.

  • Inheritance Tax

    The amount paid to HMRC upon the passing of a person's estate, or total net worth, onto an elected benefactor.

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Case study:

Fiona is a first-time property investor. She is buying a property valued at £250,000 with cash. It achieves a gross rent of £7,000 per annum, with letting costs and service charges of £2,000. She also earns a salary of £100k from her main job as a solicitor.

Stamp Duty Land Tax:

A property valued at £250,000 would pay:

3% on the first £125,000 of value - £3,750

5% on the remaining £125,000 of value - £6,250

Therefore, the Stamp Duty payable on this property would be exactly £10,000.

Income Tax:

Fiona earns over the UK’s higher rate income tax threshold of £45,000 (for 2017/2018) and so her profit from property is taxed at the higher rate of 40%. But she is allowed to deduct her lettings expenses, so her tax liability is 40% of her NET income of £5,000, i.e. £2,000. She therefore makes an annual post-tax profit of £3,000.

Capital Gains Tax:

In 5 years time, Fiona needs to sell her property to fund a new investment. She sells the property for £300k, an uplift of £50k. Before paying tax, however, Fiona is allowed to deduct costs (including Stamp Duty Land Tax and any improvement works) from this gain before paying Capital Gains Tax:

Purchasing solicitors fees: £1,000

Stamp Duty: £10,000

Selling Costs: £1,000

Total Gain: £38,000

Fiona also has her personal Capital Gains Tax allowance of £11,300 (2017/2018), reducing her total taxable gain to £26,700. At 28% (2017/2018), Fiona’s total CGT liability is £7,476.

Overall total profit over 5 years: £55,524.

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