What Taxes Are Involved With Buy to Let? (2024)

As of the 2024/25 tax year, basic taxpayers will pay a 20% tax rate on buy-to-let income, while higher tax brackets will pay 40%. Additional rate taxpayers will have to pay at a 45% rate.

You will pay the higher tax rate if you earn over £50,000, with the additional rate fees when you reach over £150,000.

The current personal allowance, the amount you can earn before paying tax, sits at £12,500.

Rental income tax in Scotland is the same as it is in England, unlike some other forms of buy-to-let tax.

So, what does this mean in practical terms?

Let’s say you’re charging £1,175 per month on rent, the current national average according to Homelet.

Over a year, that will result in an annual income of £14,100, so you would have to pay tax on that figure as it’s over the personal allowance.

However, let’s say you own a London property, an area with some of the highest rental figures.

Homelet’s statistics indicate London has an average rent of £1,975, so that would mean you would get an average annual income of £23,700.

This would still be over the threshold, so you would still pay the basic rate of income tax. You would pay the same level of rental income tax in Scotland as well.

It’s important to note though, that your rental income gets added to any other income you earn.

So if you earn £23,700 a year from your investment property and have a salary of £30,000 from your regular job, this would put you over the threshold of the higher tax bracket, meaning you pay 40% income tax.

You will pay this tax every tax year, which runs from the 6th of April to the 5th of April the following year. Income tax on buy-to-let properties is one of the main ways you will be taxed for your investment property.

Buy to Let Tax Relief: Income Tax

Like other taxes on this list, you can get buy to let tax relief on income tax in the form of allowances and expenses.

Here you can minimise the tax you have to pay by deducting expenses from your rental income.

For instance, for residential properties, there’s a bunch of costs you can deduct for the day-to-day running of the property. Keeping track of these is important for reducing your buy-to-let income tax.

According to the official government website, these expenses include:

• Letting agent fees
• Utility bills like water and electricity
• Maintenance and repairs
• Council tax
• Interest on property loans
• Accountants’ fees
• Legal fees for lets of a year or less
• Buildings and contents insurance
• Other costs like phone calls and advertising

It’s not just these running costs that you can deduct, though. If you need to replace a domestic item, you can deduct this as ‘replacement of domestic items relief.’

Domestic items include replacing beds, sofas, carpets, curtains, fridges, and crockery or cutlery.

To be eligible for this, the items bought must only be used for tenants in the property. The previous items must no longer be used. This can be a clever way of getting buy-to-let income tax relief, while also keeping your tenants happy.

Learn more about landlord taxes and regulations by reading our guide to buy to let rules.

Capital gains tax on buy-to-let property has different tax rates than income tax.

Here, the basic rate is 18%, with both higher rate and additional rate taxpayers paying 28% on the gains they make when selling a property.

You will pay this tax on the profit you make rather than the selling price of the property. You can also deduct any expenditure linked to selling the house, like broker fees.

The tax will need to be paid by submitting a “residential property return” within 30 days of completing the sale.

Interestingly, suppose you make a loss on a property. In that case, you can offset it when selling any other assets, which are carried forward indefinitely.

For example, let’s say you’re a portfolio landlord with multiple properties.

Upon selling one of your assets, you make a £50,000 loss. This 50k loss will increase the tax-free gain you make when selling another one of your properties.

Like income tax, you claim your losses through a self-assessment tax return. You will need to make this claim within four years of making the loss.

Buy-to-Let Tax Relief: Capital Gains Tax on Buy-to-Let Property

Again, there are ways to gain buy to let tax relief on your capital gains payments.

This includes:

• Losses made upon the sale of a property
• Solicitor fees involved with the selling process
• Estate agent fees involved with the selling process
• The expenditure involved with advertising the property for sale
• Stamp duty land tax

Aside from this, there’s also tax relief available. For instance, if the property you are selling was previously a main residence, the gain may be reduced.

It’s also important to note that you can’t deduct any costs linked with the general upkeep of a property and can’t deduct any mortgage interest.

Depending on your finances, you may opt for a buy-to-let mortgage when buying a rental property.

Buy-to-let mortgages can be more expensive than traditional rental properties and can involve higher minimum deposits of 25%.

A lot of buy-to-let mortgages are usually interest-only, too, and will require you to pay the interest of the loan every month without touching the overall cost of the mortgage. To pay this value off, you will have to pay additional fees.

These mortgage payments can eat away at your profits, but luckily you can get tax relief through your buy-to-let mortgage.

Unfortunately, there have been several buy-to-let tax changes regarding buy-to-let mortgages over the years, and it’s no longer as beneficial as it has previously been.

Since April 2020, buy-to-let investors are no longer able to deduct mortgage expenses from rental income. Instead, they now receive a tax credit based on 20% of their monthly interest payments.

It’s important to note that these rates target individual landlords, which is why more landlords than ever are starting to form limited companies. It can be a useful way to get tax relief on your buy-to-let mortgage but it isn’t for everyone.

Limited companies tend to get more tax benefits than an individuals. For instance, mortgage interest payments can receive 100% tax relief against the rental property income.

It naturally sounds like a no-brainer to form a company, but it’s important to remember that interest rates are usually higher for companies. You essentially trade the tax relief on your buy-to-let mortgage for higher interest rates, so you may still end up paying more.

Regardless, estate agent Hamptons & RCCIL found a whopping 41,700 new buy-to-let companies were formed in 2020, which was an overall increase of 23% since 2019.

As previously mentioned, more and more landlords are starting to form limited companies, but is this right for you?

Well, while limited companies have some tax advantages, they can also incur different fees.

Firstly, limited companies are not impacted by the changes made to mortgage interest buy to let tax relief.

This is because interest can be classed as a business expense and is therefore fully deductible from your income.

Similarly, limited companies are subject to corporation tax, which is at a flat rate of 19% (although this is set to rise to 25% in the new business year). This is hugely beneficial if you are earning income in the higher tax brackets, as it means you will only have to pay up to 25% rather than 40 or 45%.

This is where things can get complicated, though. Firstly, money can’t be taken out of the company easily.

One option is to take the money as a dividend, but only the first £2000 is tax-free. For any dividends above £2000, you could pay 8.75% at a basic tax rate, 33.75% for higher rate taxpayers and 39.35% for additional rate dividend taxpayers. That’s after the corporation tax has been paid, too!

Alternatively, you could take the money as salary, but the company will need to operate PAYE and provide national insurance contributions on the salary paid. These national insurance contributions can cost more than opting for the dividends route.

You also won’t get access to the capital gains tax allowance like individuals.

With all these parameters, it’s difficult to answer if you should form a limited company to avoid certain buy to let property tax rates.

If you aren’t sure what to choose, it’s recommended you speak to a financial expert for a full breakdown of buy-to-let tax advice.