How to be a property investor: Taxes for buy-to-let investors

Published by Emma Lunn on 29 June 2016.
Last updated on 29 June 2016

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In the sixth article in our How to be a property investor series we explain the heavier tax burden that existing and prospective landlords need to consider.

The past year has seen the Government bow to pressure to reform the tax regime for landlords.

Groups campaigning for affordable housing had repeatedly complained that landlords benefit from a range of tax advantages compared to potential owner-occupiers.

The first tax change came in the Summer Budget last year when Chancellor George Osborne announced the Government will slash the amount of tax relief on mortgage payments landlords can claim to the basic rate of 20%.

Currently landlords can claim tax relief on their mortgage interest payments at their marginal rate of tax, so either 20%, 40% or 45%.

The changes will be phased in from April 2017. Landlords who pay basic rate tax won’t see a change, but those on higher incomes will find themselves losing out.


How much could landlords lose?

Nationwide Building Society gives the example of a landlord who is a 40% taxpayer with a £150,000 buy-to-let mortgage on a property worth £200,000, with a monthly rent of £800. He currently has a net profit of about £2,160 a year. But under the new system that net profit will fall to £960 by 2020.

Mr Osborne’s next move came in November 2015 and aimed to deter landlords from investing in additional properties. The Autumn Statement included the surprise announcement that landlords and second home owners in England and Wales would pay a 3% surcharge on existing stamp duty land tax (SDLT) rates from April 2016.

The stamp duty changes saw a rush of buy-to-let purchases completed in March 2016 before the new rates took effect on 1 April.

Christian Faes, co-founder & CEO of LendInvest, says: ”The stamp duty hike spells bad news for landlords – and their tenants. Put simply: when taxes rise, someone has to pay. Our latest BTL Index shows that the likely payer is ultimately going to be the tenant, with higher rents. The stamp duty land tax hike will cause rental yields to fall for landlords, putting pressure on them to raise the rents they charge.”

Mr Faes’ view is backed up by the Residential Landlords Association (RLA) which warned the tax hikes will worsen the rented accommodation shortage and push up rents.

Research by LendInvest has found that landlords in London and the south east will be hit the hardest by the stamp duty changes, while investors in Sunderland, Blackburn, Durham, Hull and Wigan, where property prices are typically less than £125,000, will find themselves paying stamp duty for the first time.


How to lighten the tax burden

The stamp duty hikes doesn’t affect landlords buying property through limited companies – the way both institutional investors and portfolio landlords buy property. Kent Reliance, a mortgage lender, claims the move will mean more landlords buying property through companies in the future.

Those landlords looking to either incorporate their buy-to-let business, or exit the market altogether, should seek professional advice before making a decision.

Those selling up should bear in mind that they might have a capital gains tax (CGT) liability on the sale of any property that’s not their principal residence.

Currently, sellers work out the CGT after the end of the tax year as part of their tax return. However, from 2019 CGT from the sale of property will be payable to HMRC within 30 days of the sale.

Sellers will also have to pay estate agent and legal fees to sell their property.

Stamp duty rates from

Band Existing residential SDLT rates New additional property SDLT rates for landlords
£0* - £125k 0% 3%
£125k - £250k 2% 5%
£250k - £925k 5% 8%
£925k - £1.5m 10% 13%
£1.5m+ 12% 15%


Don't miss the first articles in this series: