Owning a buy to let property can be a great way to bring in extra income, but make sure you’re clear on exactly how much tax you’ll need to pay.
This article will take you through the basics of how rental income and sales profit from your buy to let property are taxed.
If you’re looking for expert advice on getting a buy-to-let mortgage, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice. Your first consultation is free.
Tax on a personally owned buy to let
If you own a buy to let personally – that is, it’s owned in your name and not by a company – and your total rental income (before expenses) in the current tax year is less than or equal to £1,000, you do not have to declare it to the taxman and you do not have to pay any tax on it. You don’t need to do anything for this to apply; it will apply automatically.
If your income from your property rental is higher than this allowance, you will need to declare it on your self-assessment tax return.
Tax will be payable on income that exceeds your personal allowance. Your personal allowance is the amount of income you can earn each tax year without having to pay tax, and for the 2023/24 tax year is £12,570.
Basic rate taxpayers (earning over the personal allowance but under £50,270) pay 20% income tax, higher-rate taxpayers (earning between £50,270 and £125,140) pay 40%, and additional rate taxpayers (earning over £125,140) pay tax at 45%.
However, you should be able to deduct certain expenses from the payable amount if you can prove they were solely for the purpose of renting and maintaining your buy to let property. These expenses include insurance policies, the costs of general maintenance and repairs (but not improvements), services such as gardeners or cleaners, and certain legal costs. You can find out more about how exactly these allowances work here on GOV.uk.
Landlords were previously able to deduct mortgage interest in full from their rental income before being liable to tax, which meant that higher-rate taxpayers benefited from considerable tax relief. However, the amount of mortgage interest tax relief that can be claimed has been gradually reduced over time, and now stands at a flat tax credit of 20% on mortgage interest, regardless of whether you’re a basic, higher or additional rate taxpayer.
You will also have to pay capital gains tax, or CGT, if you sell the property and make a profit that exceeds your current annual capital gains tax allowance. In the 2023/24 tax year, the CGT allowance stands at £6,000. If you’re a basic-rate taxpayer, you’ll pay capital gains tax at a rate of 18% on any profits above your allowance, rising to 28% if you’re a higher-rate taxpayer.
If you have to pay CGT, you’ll have 30 days from the sale completion date to notify HMRC and make a payment.
Tax on a buy to let owned through a limited company
The main alternative to owning and letting a property personally is to do so through a company that you own. This might sound complex, but it’s a path that can attract significant tax benefits, and has become much more attractive to landlords since the rule change mentioned in the previous section. However, it is not without downsides, and the costs involved can be substantial, so it’s vital to seek professional tax advice if you’re considering taking this route. You can find a qualified chartered accountant in your local area using the Institute of Chartered Accountants in England and Wales’ (ICAEW) directory of chartered accountants.
The key difference for those letting and selling a property through a limited company is that you will not be subject to either income tax or CGT. Instead, you will pay corporation tax, which currently sits at 25% of all profits. This applies to both rental yields and any profit when you come to sell the property. This could be beneficial if you’re a higher-rate taxpayer who would usually pay far more in tax.
The catch is that, as previously stated, the company’s finances are separate to your own. So, any income from letting a property through a company belongs to the company and you cannot simply dip into this pot and take an income. You will need to extract it either in the form of dividend payments or as a regular salary to yourself, and both of these are subject to their own forms of tax. You can read about how these are taxed in our article Should I own my Buy to Let property through a limited company?
Because the rules are so different, it’s important to do the calculations beforehand and see whether you are likely to save more on tax through letting personally or through a limited company.
Learn more about getting started with buy to let with our article Buy to let: a beginner’s guide. If you are interested in buy to let but don’t know if it’s the right choice for you, read our article Is buy to let a good investment? which weighs up all the pros and cons.
If you’d like to see how much you might be able to borrow for a buy to let property, simply enter your expected rental income in our buy to let mortgage calculator to get an estimate.
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