Article relevant to the tax year 2019/20
Buy to let tax tips – How does buy to let tax work?
What buy to let tax needs to be paid as a property investor? I feel that this is a good place to start by asking this question. After all, this is what our property accountants are asked each time they speak with clients. We need to understand the types of taxes involved when trying to understand how buy to let tax works.
– What is a property tax specialist and what is the difference compared to a property accountant?
– Stamp Duty Land Tax (SDLT) when buying a property investment
– Value Added Tax (VAT) when buying a commercial building, even if you wish to convert it into a residential building
– Value Added Tax (VAT) on the materials and labour for any refurbishment works
– Income tax or corporation tax liabilities on the property profits
– Capital Gains Tax (CGT) when you look to sell a property investment
– Inheritance Tax (IHT) when you die
There are a number of tax changes that will mean that the majority of property investors will pay more tax.
Difference between property accountants and property tax specialists
You could argue that there are no real differences between property accountants and property tax specialists. After all, they both focus on property profits that lead to buy to let tax. Surely they do the same job.
The role of Property accountants for landlords
Property accountants in our firm are very much focused on their accounting qualifications. They will start with their Association of Accounting Technicians (AAT), see their website for more details. They will then progress towards their Association of Chartered Certified Accountants (ACCA) qualifications, see their website for more details.
Property accountants focus very much on compliance work. Examples being self-assessment tax returns for landlords and medics. They will also prepare and submit limited company set of accounts with property investors and locum doctors.
A lot of work carried out by the property accountant is historical. The numbers involved in the tax return is very much in the past. Albeit there are a lot of suggestions of how property tax may be mitigated in the future.
The role of property tax specialists for landlords
Our property tax specialists focus their efforts on the review of self-assessment and limited company accounts. This is very much the same focus as the property accountants mentioned above.
The key difference is that our property tax specialists will focus their tax education. This is from the Association of Taxation Technicians (ATT) qualifications. Please see their website for more details. They will also develop their knowledge further through the Chartered Institute of Taxation (CIOT), see their website for more details.
Our property tax specialists will start their careers as a property accountants. They may wish to progress their careers with Optimise Accountants as property tax specialists. Their focus is very much about tax planning with landlords to reduce buy to let tax. They spend no time in preparing accounts. This is the job of the property accountants.
As property tax specialists they will speak with clients on their 30-minute tax consultation calls. These calls are used to reduce buy to let tax in many different ways, which are legal.
Buy to let tax – the basics and how to mitigate it
Stamp Duty Land Tax (SDLT) when buying a property investment
Stamp Duty Land Tax is a tax that you will pay when buying a property. There are different rates that apply based on the type of property that you buy
– Residential property investments
– Commercial property investments
Stamp Duty on Residential property investments
Stamp Duty Land Tax on residential properties will start from £125,000. You will also pay a 3% Stamp Duty Land Tax charge if you already own a property in your own name. You will also pay this 3% Stamp Duty Land tax charge if you buy a property investment inside a limited company. The 3% Stamp Duty Land Tax surcharge will apply irrespective if the limited company already owns a residential property investment.
|Property or lease premium or transfer value||SDLT rate|
|Up to £125,000||Zero|
|The next £125,000 (the portion from £125,001 to £250,000)||2%|
|The next £675,000 (the portion from £250,001 to £925,000)||5%|
|The next £575,000 (the portion from £925,001 to £1.5 million)||10%|
|The remaining amount (the portion above £1.5 million)||12%|
Please remember that you will also have to pay the 3% Stamp Duty Land Tax in certain circumstances. Therefore, the top Stamp Duty Land Tax rate is 15% on properties that have a value of £1.5m or more.
If you wish to know how Stamp Duty Land tax on residential properties may be reduced please see our extensive article. Property developers need to know that Stamp Duty Land Tax as a developer may be mitigated altogether. You can read more about this in our other article
Stamp Duty Land Tax on non-residential property investments
Fortunately, there is no 3% Stamp Duty Land Tax surcharge for non-residential / commercial properties.
Non-residential property includes
– shops or office
– agricultural land
– 6 or more residential properties bought in a single transaction
A ‘mixed-use’ property, for example, is a flat connected to a shop, doctor’s surgery or office.
|Property or lease premium or transfer value||SDLT rate|
|Up to £150,000||Zero|
|The next £100,000 (the portion from £150,001 to £250,000)||2%|
|The remaining amount (the portion above £250,000)||5%|
Value Added Tax (VAT) when buying a commercial building, even if you wish to convert it into a residential building
When you are buying a property investment you may not be aware that you may have to pay Value Added Tax. This applies if you buy an office or a shop, which the owner has opted to tax.
There could be a VAT charge if you buy an office. Even if you wish to convert it into a residential dwelling. For example:
£100,000 property purchase value
£20,000 Value Added Tax
£120,000 Total cost
This may be a surprise to you when being asked to stump up the extra £20,000. You also need to be mindful that that Stamp Duty Land Tax is applied to the total purchase price. Example:
£200,000 property purchase price
£40,000 Value Added tax
£240,000 Total purchase price
We can look at the non-residential Stamp Duty Land Tax rates from the above table. The Stamp Duty Land Tax charge on a property of £240,000 is 2% on the difference between £240,000 and £150,000. This being £90,000 X 2%. The Stamp Duty Land Tax charge is £1,800
£200,000 property purchase price
£40,000 Value Added tax
£240,000 Total purchase price
£1,800 Stamp Duty Land Tax
£241,800 total purchase price
We can now see that the cost of buying a non-residential building with Value Added Tax cost. If you wish to know how to remove Value Added Tax when buying a property investment please read our article.
Value Added Tax (VAT) on the materials and labour for any refurbishment works
You may have to pay Value Added Tax on the refurbishment costs of your property investment. The Value Added Tax will be on
– 20% Value Added Tax on materials to be put into the property investment
– 20% on Tradespeople costs if they are VAT registered.
It is worth asking your tradesperson if they are registered for Value Added Tax. If they are then your refurbishment costs will be increased by 20%. Tradespeople need to register and charge VAT once they have a turnover of £85,000 in the last 12 calendar months
For the majority of property investments, it is impossible to claim back Value Added Tax. The reason for this is because residential rent is Value Added tax exempt. You do not charge Value Added tax on the rent that you charge to tenants. You cannot claim Value Added Tax Tax on the refurbishment works of your property investment for this reason.
There are exceptions to the above. If you are buying to sell properties it is possible to claim back all the Value Added Tax charged. You may also get a reduction of Value Added Tax. The rate reduction is from 20% to 5% dependent on the type of property that you invest in.
For more information of how Value Added Tax may be reduced on your property investment please visit our other article
Income tax liabilities on the property profits
You will need to pay either income tax or corporation tax on the property profits made. Income tax is charged on property investments if they are owned in your personal name. Corporation tax is paid on the property profits when they are owned in a limited company.
Property profits will be computed as follows:
£10,000 rental income
£3,000 mortgage interest
£2,000 refurbishment costs
£1,000 letting agents costs
£4,000 taxable profits
There are different types of refurbishment costs that you will incur It is important to know what costs are tax deductible. We have discussed allowable costs in our other article. If you identify enough tax-deductible costs it is possible not to pay property tax at all.
Tax rates for property investors
Corporation tax on property profits made in a limited company is charged at 19%.
Income tax for individuals that make a profit from their property investments is a little more complex.
Income tax bands that affect property investors – High rate tax payers beware!!!
|Band||Taxable income||Tax rate|
|Personal Allowance||Up to £11,850||0%|
|Basic rate||£11,851 to £46,350||20%|
|Higher rate||£46,351 to £150,000||40%|
|Additional rate||over £150,000||45%|
High rate taxpayer you need to be aware that the minimum tax rate that will be applied is 40%. As a high rate taxpayer, it may be better to use a limited company. This is because can extract cash in a more tax efficient way. You are personally will only pay income tax as a high rate taxpayer when you extract dividends from your company.
We have discussed the use of a limited company as a high rate tax paying the property in another article.
Section 24 mortgage interest relief
You will be charged mortgage interest if you have a buy to let mortgage. Before April 2017 you were able to offset the finance costs and mortgage interest costs against your property income. These mortgage interest costs and finance costs, therefore, helped you to reduce your property profits. In turn, this means before April 2017 that your tax bill is decreased because of the finance costs and interest.
HMRC have introduced a new piece of legislation called Section 24 mortgage interest relief. Previously individuals that owned property investments were allowed to offset 100% of their mortgage interest costs. With Section 24 mortgage interest relief cap this will no longer be allowed. Mortgage interest will not be tax deductible from 2021. This includes all finance costs such as arrangement fees, re-mortgage finance costs as well.
For more information about Section 24 mortgage interest relief cap please read our extensive article.
Clearly, Section 24 affects high rate taxpayers more than basic rate taxpayers. Some of our clients tax rate is increasing beyond 60%-70% because of the Section 24 mortgage interest relief cap changes. You could be forced to become a high rate taxpayer. This is because of section 24 tax calculations suggesting that you have more taxable income than before.
We have seen some of our clients pay tax on loss-making properties. This because mortgage interest and finance costs from 2020 / 2021 will no longer be allowed. Let us look at a quick example:
£12,000 rental income
£8,000 mortgage interest costs
£6,000 other allowable expenses
(£2,000) loss that is actually made
Section 24 tax changes the following taxable profits will be made
£12,000 rental income
£0 mortgage interest cost
£6,000 other allowable costs
£6,000 taxable profit
Tax is charged on the calculated taxable profit even though there is an actual loss of £2,000.
Allowable expenses include:
• Interest on buy to let mortgages and other finance charges (but see below)
• Council tax, insurance, ground rents etc
• Property repairs and maintenance – however large improvements such as extensions etc will not be income tax deductible. They will be added to the cost of the property when it is sold and be deductible against any capital gain.
• Legal, management and other professional fees such as letting agency fees.
• Other property expenses including buildings insurance premiums
Corporation tax liabilities on the property profits
Unlike income tax, as shown above, does not allow you to offset all of your mortgage interest/finance costs. These costs are allowed fully allowable inside a limited company. What is better is that the corporation tax rate inside a company is 19% but drops to 17% from April 2020. This means that a company pays less tax than individuals that are basic rate taxpayers (20%).
A bonus tax incentive of using a limited company is that the first £2,000 dividends are tax-free for each shareholder. £4,000 tax-free income via dividends can be earned if you have a husband and wife as shareholders. You will pay income tax if you take more than £2,000 dividends as follows
– 7.5% as a basic rate taxpayer
– 32.5% as a high rate taxpayer
– 38.1% as an additional rate tax payer
Mortgage interest rate is likely to be higher in a company than a buy to let mortgage in your own name.
We have written more about extracting money out of a limited company in another article. You only pay income tax on the amount of money that you extract out of a company. The rest of the money in the limited company may be invested.
Capital Gains Tax (CGT) when you look to sell a property investment
There are a lot more landlords that are looking to sell their properties. This is because of the number of tax changes and legislation making life a lot harder.
When you dispose of a property investment you will need to pay Capital Gains tax. The gain is computed as follows:
£200,000 net sales price (inc legal/agents fees and selling fees)
£100,000 purchase price
£100,000 Capital Gain
Capital Gains Tax Annual Allowances
Every individual is allowed a Capital Gains annual allowance. These are as follows
|2015 to 2016||2016 to 2017||2017 to 2018||2018 to 2019||2019 to 2020|
|Capital Gains Tax annual allowances||£11,000||£11,100||£11,300||£11,700||£12,000|
This means that the taxable gain from above is reduced
£100,000 capital gain from above
£12,000 capital gain annual allowance
£78,000 taxable capital gain
Capital Gains Tax rates for individuals that own residential property investments
The Capital Gains Tax rates are as follows:
18% for basic rate taxpayers
28% for high rate taxpayers
If the above person was a high rate taxpayer then the tax would be as follows
= £78,000 X 28%
We have always said that Capital Gains Tax is optional. Capital Gains Tax does not need to be paid. There are many ways of how you can reduce Capital Gains Tax when selling an investment property. Please read our article of how you can immediately reduce your Capital Gains Tax liability
Capital Gains Tax rates for limited companies that own residential property investments
Capital Gains Tax in a limited company follows the standard corporation tax rules. Therefore profits on disposing of a property investment are taxed at 19%. Please note that limited companies do not benefit from the annual Capital Gains allowances.
Mortgage editors comments
There are three key steps to purchasing an investment property:
- Arranging the finance – securing a mortgage for your buy-to-let, either in your own name or through an SPV limited company
- Ownership structure – identifying whether to purchase the property through an SPV or in your own name, based on your own set of circumstances
- Investment strategy – will you go after high rental yields, strong capital appreciation, or a balance of both?
At SPV Company Mortgages, you find a huge range of mortgage deals – both personal & SPV – from across the entire lender spectrum.
Our friends at Optimise can offer professional, up-to-date tax advice to help you select the right ownership structure for your needs – and no matter which structure you’ve chosen, we can get you pre-approved for mortgage finance with the very best lender deals within 24 hours.
From there, you can take advantage of our free property investors toolkit and extensive property strategy knowledge to determine which investment strategy is best for you.
Ready to unlock access to the best BTL mortgage deals? Get in touch with our mortgage experts at SPV Company Mortgages (link) today. https://www.spvmortgages.co.uk/contact-us/