How does tax work on BTL mortgages?

If property prices continue growing, a buy to let (BTL) property can be a great long-term investment. It’s no free lunch, though – as a landlord there are a number of taxes you may be liable to pay.

There’s Income Tax, Stamp Duty, Capital Gains Tax and so on. This page explains how they each works and what you might be liable for.

Stamp Duty

Note: Stamp Duty has different names and rates in Wales, Scotland and Northern Ireland. Our guide relates to England and Northern Ireland only. Follow the links at the foot of this page for more details on Scotland and Wales.

Stamp Duty is a land tax, and it has to be paid within 30 days of buying a property. The amount you’re liable for depends on the value of the property.

You pay Stamp Duty whenever you buy a property worth more than £125,000, unless you’re a first time buyer.

Buy to let mortgages attract higher Stamp Duty rates than standard mortgages. This table shows the difference:

 

Property value

Residential

Buy to let

£125,000 or less

0%

3%

£125,001 to £250,000

2%

5%

£250,001 to £925,000

5%

8%

£925,001 to £1.5m

10%

13%

More than £1.5m

12%

15%

 

Stamp Duty is a tiered tax, which means you pay different rates on each tier of a property’s value.  If, for example. you were looking for buy to let mortgage on a property worth £300,000, you’d pay:

So, you’d be liable for £13,999.87 in Stamp Duty. By comparison, if you were buying the place to live in rather than rent out, you’d only pay £4,999.93 – or nothing at all if you were a first time buyer.

Income Tax

Unless you’re a limited company owner, you need to pay income tax on your rental income. Rent is taxed just like any other income – so that’s 20% (basic rate), 40% (higher rate) or 45% (additional rate) depending on how much money you earn from rent each year.

If you’re registered with Companies House, you pay Corporation Tax instead. It’s set at 19% for the 2019/20 financial year and will be 18% in 2020/21.

Mortgage interest relief

Landlords used to be able to reduce their tax bills by deducting mortgage interest and other costs from their rental income and being taxed on that lower figure.

This ends on April 5, 2020. From that point, landlords will instead be taxed on all of their rental income, without being able to make any deductions, and get a 20% tax credit.

If you’re a basic rate taxpayer you won’t be affected by the change, but if your total annual income, including your rental income, puts you into the higher (40%) or additional (45%) tax rate bands, you’ll pay more tax than you would have before things were changed.

Capital Gains Tax

Capital Gains Tax (CGT) is payable when you sell a buy to let property. If it has increased in value, you’ll be taxed on the profit you make.

Let’s say you buy a home for £130,000 and sell it for £190,000 five years later. You get an annual CGT allowance of £11,700, which means you’d be liable for tax on the remaining £48,300.

CGT has two rates: 18% for people that pay basic rate Income Tax and 28% for people that pay higher or additional rate Income Tax. You can discover more about rates and reliefs here.

Get help with your buy to let mortgage

Before you think about getting into BTL property, it’s worth seeking tax advice. A good accountant can help with tax planning and gathering evidence for your income reports.

When you’re ready, our Mortgage Matcher will show you how much you could borrow, what you’re eligible for and the best deals you can get. Click here to get started.

Other Stamp Duty/Land Transaction Tax rates

Find information on Stamp Duty/Land Transaction Tax rates in Scotland and Wales

Other articles you may find useful

Who can get a buy to let mortgage?

How to choose a buy to let mortgage

How much could I borrow for a buy to let mortgage?

What is a buy to let yield?