Property tax for landlords & investors - Stamp Duty (SDLT)
This page focuses on landlords and investors. Please note that HMRC has a useful page for first time buyers and Stamp Duty rates.
There are many UK property tax matters to consider when building a portfolio. Some exemptions and reliefs are available to you as a UK landlord.
The first issue Landlords will encounter is Stamp Duty (SDLT). This is a purchase cost for a residential buy-to-let or commercial property in the UK. The rates for residential properties differ from those for commercial units. You will need to be well-versed in stamp duty rates, as conveyance solicitors make mistakes. Stamp Duty is based on the purchase price of the house.
There are two types of SDLT that landlords need to be aware of on residential buy-to-let properties
– A banded rate of SDLT that starts from £250,000
– A 3% SDLT higher rate on properties exceeding £40,000 and is either the second purchase in personal names or a limited company
There is one SDLT type for landlords purchasing a commercial (non-residential) units.
– A banded rate of SDLT that starts from £150,000
You need to be aware of Stamp Duty taxes before you complete on a house purchase.
Buy-to-let VAT
VAT: buy to let residential properties
Landlords/investors may not initially be concerned about VAT regarding buy-to-let properties. This is understandable. Buy-to-let residential rent is VAT exempt, and no VAT is to be charged on residential rents. This also means that landlords cannot reclaim VAT on their expenses.
Landlords who buy materials and labour for refurbishment may pay 20% VAT. It is possible to reduce this VAT on different property types from 20% to 5%.
VAT: Commercial units
VAT may be charged on the commercial units if it has opted to tax. This means that the seller must charge 20% VAT. It is possible to reduce this VAT from 20% to 0%, depending on your intention.
If you have opted to tax the unit, 20% VAT will be charged on commercial property rents. You will be able to reclaim VAT on any related costs. This will be an advantage to you but maybe a disadvantage to your tenants if they cannot reclaim the VAT you have charged on their commercial property rent.
The different types of buy-to-let tax can be confusing. Work with a property accountant to help you understand them all.
Income & corporation tax
Investors & landlords that make profits on their investments will pay property tax.
Profits will be shown on their self-assessment. The amount of profit depends on their total income. The rates start from 0% up to 45%.
The 45% I just mentioned could actually be 60%+. Why would tax be more than 45% (as it is for an additional rate)? Section 24 mortgage interest relief cap means that residential buy-to-let mortgage. As an example
£10,000 rental income
£4,000 mortgage interest costs
£3,000 other expenses
£3,000 profit
HMRC will place a 40% income tax on high-rate taxpayers of £7,000 (£10,000 rental income less £3,000 other expenses). The payable amount would be £2,800. HMRC will give a 20% reducer on the buy-to-let mortgage interest costs. HMRC will give £800 as a reducer (£4,000 buy-to-let mortgage interest costs).
£2,800 40% as shown above
(£800) 20% reducer on the mortgage interest costs
£2,000 income tax on the profits
£2,000 on profits of £3,000 is 67%. Our accountants have seen landlords make a loss when they refinance their properties, resulting in greater mortgage interest costs.
HMRC uses a fiscal year to declare and pay financials. The fiscal year starts on 6th April and ends the following 5th April. Self-assessment returns must be submitted and paid on 31st January following 6th April.
Corporation Tax for landlords that own property in their limited company
Landlords that own buy-to-lets may wish to think about using a property investment limited company going forward.
One of the reasons for using a limited company over owning properties in your name is Section 24, as shown above. Section 24 mortgage interest relief cap only affects landlords who own buy-to-let properties. Section 24 does not affect property investment limited companies.
We also need to consider the limited company’s top rate. HMRC has paced a value after 1st April 2023 at an effective rate of 26.5% compared to 45% income tax on self-assessment.
There is greater flexibility in offsetting costs in a limited company than it is when a property is owned in their personal name. It is possible for you to transfer properties into a limited company.
CGT
Landlords selling properties in their name will pay CGT if a gain is made. A gain is the difference between the sales price and the purchase price of a house.
The CGT rate depends on whether the property is residential or commercial (non-residential).
Landlords selling the residential property will pay:
– 0% CGT rate is charged if the disposal is less than their annual CGT of £3,000
– 18% CGT rate for basic-rate
– 24% CGT rate for high-rate
Landlords selling the non-residential/commercial property will pay:
– 0% CGT rate is charged if the disposal is less than their annual CGT of £3,000
– 10% CGT rate for basic-rate
– 20% CGT rate for high-rate
CGT on residential property must be reported to HMRC within 60 days. Landlords that sell their buy to lets will need to pay Capital Gains Tax at the same time as the report submission to HMRC.
IHT
Inheritance Tax affects many landlords.
IHT is charged on net assets exceeding £325,000. Net assets mean the gross asset value of an asset minus debts/loans/liabilities. For example:
£600,000 home value
£200,000 residential mortgage balance
£400,000 net asset value
The £400,000 net asset value exceeds £325,000 if one person owned it and had no other assets. Fortuitously, there is another IHT reduction in a Residential Nil Rate Band (RNRB) of up to £175,000.
This example produced no IHT liabilities because the £400,000 is initially reduced by the £325,000 IHT lifetime allowance and a further £75,000 Residential Nil Rate Band (RNRB).
Most landlords buy properties over a long period of time, which helps them build wealth for their families. Sadly, this also introduces a 40% IHT liability on the death of their assets.
Stamp Duty Land Tax (SDLT) is a paid on purchases in the UK. For investors, higher rates apply to additional properties compared to those for primary residences. This additional surcharge is 3% on top of the standard rates.
Rental income is subject to Income Tax. Landlords must declare their rental earnings on their self-assessment returns, bands (20%, 40%, or 45%).
Landlords can deduct allowable expenses from their rental income, including mortgage interest (subject to restrictions), repairs, maintenance costs, insurance, letting agent fees, and utility bills paid by the landlord.
CGT is charged on the profit made from selling an investment. The rates for CGT on residential are 18% for basic-rate taxpayers and 24% for higher and additional-rate taxpayers, after deducting any available allowances and reliefs.
Yes, landlords in the UK can benefit from several reliefs, including Private Residence Relief (if they have lived in the property at some point), Lettings Relief (under certain conditions), and allowable expenses deductions.
