You will pay tax on any buy-to-let property you own in several different ways and at several different stages of the process of buying and owning an investment property.
It can be confusing to know what tax you’ll pay and when, so we’ve broken down what to expect in this section of the blog.
For more details about buy-to-let tax rules, try reading our blog where we go into detail about what you’ll pay.
Stamp Duty Land Tax
Stamp Duty Land Tax (SDLT) is the first buy-to-let tax you’ll pay when investing in buy-to-let property, and potentially one of the most expensive.
This is a tax you pay to HMRC when purchasing any land or property in the UK, added to the purchase price when you pay. You need to pay stamp duty within 30 days of buying the property.
How much stamp duty you pay rises with the property price, with you paying increased amounts on each portion of the property’s value.
Buy-to-let investors pay a higher rate of stamp duty, as anyone purchasing an additional property needs to pay a 3% surcharge on the stamp duty that they pay. Those investing from overseas will pay a further 2% on any UK property they buy, even if they are UK citizens.
We’ll show you an example of how stamp duty works to help you understand what to expect.
Here is a breakdown of the current SDLT rates for England and Northern Ireland. For Scotland and Wales’ rates, try our blog on buy-to-let stamp duty.
For example, if you buy a buy-to-let property for £300,000, this is the stamp duty you would pay:
3% on the first £250,000 of the property = £7,500
8% on the next £50,000 of the property = £4,000
For a total of £11,500 worth of stamp duty.
Rental income is one of the main ways you earn money from buy-to-let investments, so being aware of how income tax affects your returns from it is essential.
You are charged rental income on any earnings you make in a year, so the passive income you make from buy-to-let properties falls under this.
The amount you earn from all your incomes, including any day jobs you have as well as investments, decides what threshold of income tax you will fall under, in turn deciding how much income tax you will pay each year.
While the bulk of your income will come from the rent you collect regularly from your tenants, there are other ways you might make money, such as if your tenants provide payments for repairs or bills.
If you charge non-refundable deposits or have money that’s been kept over from a returnable deposit following the end of tenancy, this can also get factored into your total income.
You need to report this income, if it’s more than £2,500, on a self-assessment tax return. There’s more information on how to do this here.
Every year, you get a personal allowance of £12,570 which is tax-free, and any income you make above this threshold is eligible to be taxed.
The current rates for income tax in England and Northern Ireland for 2023/24 are as follows:
With this in mind, here is a breakdown of what you might expect to pay annually through income tax:
Salary from work = £50,000
Income from a buy-to-let property = £14,000
For a total income of £64,000
After the tax-free personal allowance is deducted, this leaves you with a taxable income of £51,430. This puts you in the higher-rate threshold, meaning you will pay an income tax of 40% on your earnings.
In total, this would mean you pay £20,572 in income tax every year while you make this amount of money. Naturally, this would change if your income changes, or if the tax rates vary in the new year.
Capital Gains Tax
The final main way you will pay tax on buy-to-let properties is through capital gains tax, which is paid when you sell an investment property.
Another way you make money from buy-to-let is through capital growth, where the value of property rises over time so that when you are ready to sell, you can make substantial profits.
Per Land Registry data, house prices have risen by 27.7% in the past five years, so there is serious potential for some major profits right now!
Capital gains tax is charged on the profit you make from the sale of any physical asset, which property falls under. You don’t need to pay tax on the overall price of the sale, just the profit you make from when you first bought the property.
Much like income tax, the amount you pay is determined by the tax bracket you fall under, but this is more simple to understand.
Basic-rate taxpayers pay 18% on the sale of any residential property, while anyone in a higher tax bracket will pay 28%.
So if you bought a buy-to-let property for £200,000 and sell it for £250,000, you would pay tax on the £50,000 profit.
If you are a higher-rate taxpayer, you would pay 28% of the profit, which comes to £14,000.
