10 min read
Changes to buy-to-let tax relief
Who’s affected
- Partnerships letting residential properties
- Trusts responsible for tax on residential rental profits
- Individual landlords renting residential properties in the UK (including those living abroad)
Who’s not affected
- Companies letting residential properties (both UK and non-UK)
- Landlords with furnished holiday lettings (FHLs)
Important buy-to-let taxes in the UK
1. Income tax
- Taxing rental income
- Calculate gross rental income: This is the total amount of rent received throughout the tax year.
- Deduct allowable expenses: HMRC allows the deduction of various property maintenance costs before calculating the tax liability.
- Taxable rental profit: Subtract the allowable expenses from the gross rental income. This remaining amount is the taxable rental profit.
- Declare on Self Assessment: Include this taxable rental profit on the Self-Assessment tax return.
- Pay income tax: You’ll pay income tax on this profit at your marginal tax rate.
- Allowable expenses to reduce your tax bill
- Property maintenance: Costs associated with repairs, replacements, and general upkeep.
- Letting agent fees: Fees paid to a letting agent for finding tenants and managing the property.
- Property insurance: Premiums for buildings and contents insurance on your buy-to-let property.
- Council tax: It’s the annual local council tax levied on your property.
- Utilities: If you pay for utilities like water, gas, and electricity, you can deduct these costs (but not if the tenant pays them directly).
2. Stamp Duty Land Tax (SDLT)
SDLT is levied on most property purchases in England and Northern Ireland, while Scotland and Wales have their Land Transaction Taxes. Understanding SDLT is crucial for buy-to-let investors as it impacts the upfront costs of purchasing properties.
How stamp duty on buy-to-let applies
As a buy-to-let investor, you’ll be liable for SDLT on the purchase price of a residential property. This inclusion is essential for calculating the total investment needed.
Essential surcharge for buy-to-let investors
Buy-to-let investors purchasing a property as a second home will face an additional 3% surcharge over the standard SDLT rates. This surcharge is implemented to manage the increased demand in the buy-to-let market.
Limited SDLT relief options for buy-to-let
Unlike first-time homebuyers who benefit from specific reliefs, buy-to-let investors generally cannot access these reliefs. However, specific circumstances may offer relief, so staying informed is essential to maximise investment returns.
Potential SDLT exemptions
- Property inherited through a will
- Purchasing a freehold property for less than £40,000
- Transactions where no money or property exchange occurs
- Acquiring certain types of leases valued below specific thresholds
- Property transfers resulting from a divorce or civil partnership dissolution
- Using alternative property financing arrangements that comply with Sharia law, where the provider pays SDLT
3. Capital Gains Tax (CGT)
When you sell a buy-to-let property, you’ll likely be liable for the Capital Gains Tax on any profits you make. Understanding CGT is crucial when planning the sale of your investment property.
Calculating Capital Gains Tax
Capital Gain = Selling Price – (Purchase price + Improvement costs) – Capital Gains Tax Allowance
CGT allowances
Individuals have an annual CGT allowance each tax year that offsets their capital gains. Currently (April 2024), this allowance is set at £3,000. Any capital gain exceeding this allowance is subject to CGT.
Principal residence exemption
- The property must have been your main home for part of the time you owned it.
- You may need to designate the property as your principal residence on your tax return for the years you claim the exemption.
- You can often still claim the exemption for certain periods when you weren’t living in the home, subject to specific limits.
- If the property wasn’t your principal residence for all the years you owned it, you might qualify for a partial exemption.
- Costs for improvements made while it was your principal residence can often be deducted from the capital gain.
CGT reliefs for landlords
a. Principal private residence relief (PPR Relief)
If you’ve ever lived in the buy-to-let property as your primary residence at any point, you might be eligible for PPR Relief. This relief can gradually reduce or even eliminate your capital gain for tax purposes. Here’s how the exemptions work:
- The property must have been your main residence during your ownership to qualify for PPR Relief.
- The relief covers the periods you actually lived there and extends to the last nine months of ownership, which is beneficial if you moved out before selling.
- Suppose you rented out the property during your period of ownership. In that case, you might also qualify for Letting Relief, which can further reduce your capital gains, especially if you share occupancy with your tenants.
b. Entrepreneurs’ relief
- You must have owned the business or asset for at least two years before the sale.
- The asset or business sold must be part of a trading business you’re significantly involved in.
Current Capital Gains Tax rates (as of May 2024)
- Basic rate taxpayers: Pay 18% CGT on capital gains exceeding the annual exempt amount (currently £12,300).
- Higher rate taxpayers: Pay 28% CGT on capital gains exceeding the annual exempt amount.
4. Value added tax (VAT)
Generally, VAT doesn’t apply to most buy-to-let property purchases or ongoing rental income, as residential property purchases are usually exempt from VAT. However, VAT may be relevant in certain situations:
a. New build purchases
If you’re buying a newly constructed property directly from a VAT-registered developer, you might need to pay VAT on the purchase price. This is because new builds are considered a “supply of a service” by HMRC.
b. Extensive renovations
VAT might apply to the contractor’s services if you plan major renovations involving massive construction work, such as converting a property into multiple dwellings.
5. Non-resident landlord scheme (NRL Scheme)
Who needs to register?
If you’re a landlord letting residential property in the UK and are not a resident for tax purposes, you’ll likely need to register for the NRL Scheme. This typically applies to landlords living abroad or those who spend less than 183 days in the UK per tax year.
Implications of NRL registration
- Letting agents must deduct tax: Agents managing properties under the NRL Scheme must deduct a flat-rate tax of 20% from the rental income before paying it to the non-resident landlord, ensuring some upfront tax collection.
- Direct tax returns (optional): Non-resident landlords can register for Self Assessment tax returns and claim tax relief on certain allowable expenses, reducing their overall tax liability.
6. Let property campaign expenses
The Let Property Campaign allows landlords to disclose any previously untaxed rental income and get their tax affairs in order. While expenses related to the campaign are not tax-deductible, certain costs incurred can be treated as tax-deductible property management expenses.
Allowable expenses to reduce your tax bill
- Letting agent fees: Fees paid to a letting agent for finding tenants and managing the property
- Legal and accounting fees: Fees related to managing the property
- Costs of maintenance and repairs: Costs associated with the upkeep and repair of the property
Buy-to-let tax planning strategies
As a buy-to-let landlord, optimising your tax strategy can reduce your tax liabilities and enhance the profitability of your investments. Here are three approaches to achieve this:
