What are the different taxes I have to pay on my buy-to-let investment?

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.

Here are the different types of taxes:

1.

Income Tax

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 =

0%

£11,001 to £43,000 =

20%

£43,001 to £150,000 =

40%

£150,000+ =

45%

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:

  • Ground rent
  • Building insurance
  • Legal fees, management fees, accountancy fees
  • Property repairs and maintenance
  • Interest on buy-to-let mortgages

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.

2.

Stamp Duty Land Tax

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 =

3%

£125,001 to £250,000 =

5%

£250,001 to £925,000 =

8%

£925,001 to £1.5m =

13%

£1.5m+ =

15%

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3.

Capital Gains Tax

If you sell a property that isn't your main home then the profit from the sale - the capital you have gained - will be taxed and you must declare your interests to HMRC. However, as an individual you get an annual allowance to offset against gains made. This allowance stands at £11,100 for the 2016/17 tax year and is separate from the annual personal income tax allowance.

If the gain made is greater than the £11,100 allowance then you will pay either 18% or 28% tax on the profit, depending on your income and the amount of capital gains you have accrued.

Once again, it is advisable to approach a qualified accountant to assist you with these matters. You can offset expenses of a capital nature, such as replacement windows, against capital gains tax when the property is sold. As this may be many years after the works it is important that you keep records and evidence of any such expenditure.

When you come to sell your property, make sure to check with a financial adviser or accountant what you can claim back to ensure that you are paying the correct amount.

4.

Inheritance Tax

Inheritance tax is the amount paid to HMRC upon the passing of a person's estate, or total net worth, to a benefactor. This applies for a lump sums of money, pensions, and property.

If you are single and pass away with an estate worth more than £325,000 (including money, property, and investments, but after deducting debts and expenses such as funeral costs), 40% tax will become due on everything above £325,000. For example, if you leave behind an estate worth £500,000, the tax bill will be £70,000 (40% on £175,000 - the difference between £500,000 and £325,000).

Married couples and civil partners are allowed to pass their possessions and assets to each other tax-free, and the surviving partner is allowed to use both tax-free allowances (providing one wasn't used at the first death). At the extreme, this effectively doubles the amount the surviving partner can leave behind tax-free without the need for special tax planning.

As well as on your estate at death, inheritance tax may also be payable on gifts you make during your lifetime, especially if you die within seven years of making the gift. Gifts fall into four categories:

  • Tax-free
  • Potentially tax-free
  • Taxable, but no tax due at the time the gift is made
  • Taxable, and tax is paid at the time the gift is made

Inheritance tax that becomes due on money or possessions passed on when you die is usually paid from your estate - everything you owned, minus debts and expenses such as funeral costs.

However, if the tax is due on gifts you made during the last seven years before your death, the people who received the gifts must pay the tax due. If they cannot or will not pay, the amount due then comes out of your estate.