How to be a property investor: Understanding property taxes

Published by Emma Lunn on 06 July 2016.
Last updated on 06 July 2016

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Stamp duty

Stamp duty is a one-off tax that you pay when you buy a property in the UK. It's set in tiers depending on the price of the property.

Since 1 April 2016 landlords and investors have paid a 3% stamp duty surcharge when they purchased new properties.

“Buying a new investment property is now potentially much more expensive as a result of the additional stamp duty charge, and some amateur landlords will find it harder to make the sums add up,” says Christian Faes, co-founder and CEO of LendInvest, “For many small landlords, expanding the size of their portfolio will be out of the question.”


Income tax

Landlords need to pay income tax on any profit that they make from renting out a property. The profit is the money left once they’ve added up your rental income and deducted any allowable expenses.

Changes to income tax for landlords will start to take effect in April 2017. Currently landlords can claim tax relief on their mortgage interest payments at their marginal rate of tax, so either 20%, 40% or 45%. But this tax relief will eventually be reduced to the basic rate of 20%.  Read more about the new taxes on landlords.

The move will see landlords who pay the higher rate of tax make less profit or even a loss.

If you make a loss on your buy-to-let property, you can carry it forward and set it off against rental profits in future tax years, but you cannot set it off against other income. Read more about how to deal with tax on rental income.

“One option for landlords will be to simply raise rents, but they will have to be careful; raising them too much will dent demand for the property, and may end up costing them even more as a result of void periods,” says Mr Faes. “Other landlords may look to absorb some or all of this additional cost, but obviously this will damage, and in some cases, essentially wipe out their profit margins."

Council tax

Council tax is levied by the local authority per property on a banding basis. In the majority of cases liability for council tax lies with the tenant.  However, landlords are liable for council tax during void periods at their properties.

There are discounts available. However, these will depend on whether the property is furnished or unfurnished and the level of discount set by the local authority.

Capital gains tax

Capital gains tax is payable when you sell a buy-to-let property at a profit from when you bought it.  Everyone has an annual tax-free capital gains allowance of £11,100 (for 2016/17).

Landlords can benefit from tax relief if the property has been their main home at some time (called private residence relief or PRR), plus the last 18 months of ownership. Landlords can also reduce the capital gains tax due by claiming letting relief.

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.


Inheritance tax

When you die your buy-to-let properties will form part of your estate for inheritance tax purposes.

If your estate exceeds £325,000 (£650,000 for married couples or civil partners), inheritance tax is charged at 40% on everything above this threshold.

Save tax by incorporating

Accountants PwC says if a private landlord transfers a property into a company structure, known as incorporating a business, the total tax rate is greatly reduced.

The graph below shows the total tax rate for private landlords compared to businesses after the tax relief changes have taken effect in 2020.

It assumes:

  • The property is worth £100,000
  • The landlord is in a higher tax bracket
  • The mortgage is at 85% loan-to-value

Graph showing tax rate for private landlords

At a mortgage interest rate of 5% the tax levy would be 106% for a private landlord but just 49.2% for a business.


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