It is important to be aware of the different types of tax which you are liable to pay on your buy-to-let property. The various tax laws can be complicated, but as long as you are fully aware of your tax obligations then it should not be an off-putting part of the process.
Rental income from a buy-to-let property is the same as any other income, and Income Tax must be paid. The rate at which rental income is taxed at is the same as for all other income:
Up to £11,000 =
£11,001 to £43,000 =
£43,001 to £150,000 =
Landlords have tools at their disposal to minimise this tax liability. There are certain aspects of the landlord's day to day life which qualify as expenses when the accounts are all put together:
As you can see, there is a significant amount of tax relief available to landlords. However, in April 2015 the Government made changes to the tax relief available on the interest on buy-to-let mortgages. Now landlords will pay tax on their mortgage interest minus 20%. Therefore, a higher rate taxpayer will pay 40% on their rental income minus 20% of their mortgage interest.
Stamp Duty Land Tax (SDLT) is a progressive tax on all land transactions in the UK, excluding Scotland, introduced in 2003 and is payable to HMRC. The amount of SDLT you have to pay is dependent on the value of the property you are buying.
SDLT is a mandatory tax on all property purchases valued over £40,000, with the charges working on a tiered system. You will pay 3% on the first £125,000 of your property, and 5% on the subsequent £125,000. For example, if you purchased a property worth £200,000 you will pay 3% on the first £125,000 and 5% on the remaining £75,000.
The new taxation levels were introduced in April 2016 and remain in force. The tax brackets are:
£40,000 to £125,000 =
£125,001 to £250,000 =
£250,001 to £925,000 =
£925,001 to £1.5m =