Buy-to-Let Tax Changes Explained

The Government have introduced new tax rules for landlords over the last few years. These changes may affect your buy-to-let portfolio and investment strategy, so it’s good to know what to expect and what relief you’re entitled to.

The tax changes affect those who intend to purchase, own or intend to sell a buy-to-let property.

In this guide, we explain all the recent and upcoming buy-to-let tax changes that all landlords need to be aware of.

From the 23/09/2022 the Stamp Duty threshold was raised to £250,000 – including for buy-to-lets and second properties. This is set to stay in place until March 2025. You can see the current Stamp Duty rates below.

Both the standard SDLT rate and the SDLT rate on second properties or buy-to-lets is payable on the purchase of additional properties, including buy-to-lets and second homes. You can find out more information in our guide: Stamp Duty on Second Homes.

Further considerations you may need to be aware of include:

Let to buy: if you move out of your main residence, without selling it and buy another property, you’ll have to pay the 3% Stamp Duty surcharge. However, if you sell your original residence within 36 months of completing the purchase you’ll be eligible for a full refund of the additional Stamp Duty you paid. Learn more about claiming a refund in our guide Second Home Stamp Duty.

Granny annexes: if the house you buy has a “granny annexe” then it’s unlikely you’ll have to pay the extra 3% Stamp Duty. You’ll only be liable for the higher rate if the annexe:

• Can be sold separately from the main house
• Has its own entrance
• Has its own water and electricity supplies
• Is worth more than £40,000 by itself
• Receives its own Council Tax bill

Most landlords know you can deduct certain allowable expenses from your rental income to reduce the amount of Income Tax you pay. From 1 April 2016, the Replacement of Domestic Items Relief replaced the Wear and Tear Allowance (WTA) which allowed landlords of fully furnished properties to claim an annual tax deduction based on 10% of their rental income.

Under the Replacement of Domestic Items Relief, landlords are now only able to claim for the actual cost of replacing furnishings. This covers moveable furniture, such as televisions, carpets, curtains, fridges and crockery.  

Items such as fitted units, baths, kitchens and boilers are usually still classed as allowable expenses, so you shouldn’t be taxed on them - so long as you only replace them. If you want to deduct them as allowable costs, you can’t make improvements; they must be considered repairs.

In 2020, the UK government introduced a new change that saw tax credit on mortgage interest payments replace finance costs restriction.

Before 2017, you could deduct finance costs from your rental income, like mortgage interest. HMRC started phasing out the finance costs you could deduct in 2017 over a 4 year period, simultaneously introducing a new relief called “tax credit”.

Tax credits, which came into full effect from April 2020, mean that landlords can no longer deduct any of their mortgage interest from their rental income when calculating their taxable profit. Instead, landlords receive a 20% tax relief on mortgage interest payments.

For more information on how this tax credit system works, see our guide: Rental Income and Other Landlord Taxes.

When you sell your main residential property, you receive something called Private Residence Relief. Private Residence Relief means that you don’t have to pay Capital Gains Tax. You usually pay Capital Gains Tax upon the sale of a property that’s not your main residence, so landlords who sell buy-to-lets normally pay CGT.

As a landlord, you can claim Private Residence Relief for the period that you used the property you’re selling as your main residence, as well as the final 9 months that you own the property – this is regardless of whether you rented it out in those final 9 months. If you own a property for more than 9 months after you’ve moved out, you’ll pay CGT on the months not covered by PRR.

From April 2020, the relief period was reduced from 18 months to 9.

See our guide, Capital Gains Tax on UK Property, for more information on Capital Gains Tax.

Letting Relief can greatly reduce the amount of Capital Gains Tax you pay when you sell a buy-to-let. You can make up to £40,000 in tax-free gains.

To qualify for Letting Relief currently, you must share an occupancy with your tenants.

Find out more in our guide: Capital Gains Tax on UK Property.

You pay Corporation Tax on the rental profits on properties held in a limited company.

This means if you own buy-to-let properties through a limited company, you'll pay Corporation Tax on the rental profits instead of Income Tax.

From 01/04/2015 - 31/03/2023, you paid a single rate of Corporation Tax. Since then, the amount and rates at which you pay Corporation Tax depends on how much your company made in profit. .

If your company made more than £250,000 over the accounting period, you'll pay the main rate of 25% on your rental profits. If your company made a profit of less than £90,000, you'll pay a "small profits rate" of 19%. If your profits were between £50,000 and £250,000 you may be entitled to Marginal Relief.

The buy-to-let tax changes are significant, not just because they have serious tax implications for landlords, but also because non-compliance can have severe consequences.

For example, the penalty for not paying the right amount of tax on your rental income can be high, up to 100% of your entire rental income. Moreover, the HMRC has the right to issue a penalty for failure to notify them about your income, as well as inaccurate tax returns. 

Such high penalties can erode a large portion of your rental income, potentially affecting your ability to make mortgage payments. Non-compliance can also make it difficult to subsequently sell the property, as it could have unattractive incumbents attached to it. 

Changes in tax law can be challenging to follow, and it can be tricky to ensure compliance without tax advice so it’s always best to consult an accountant or tax adviser. Nonetheless, there are things you can do to stay compliant, such as:

• Familiarise yourself with the deductions available to you, such as Replacement of Domestic Items Relief
• Keep a clear and accurate record of your rental income and retain copies of all documentation for a potential audit
• Keep abreast of updates from the HMRC and make a note of any deadlines for tax returns

While our advisers can’t give tax advice, they can talk to you about the benefits of limited company buy-to-lets vs buy-to-lets in your personal name and other mortgage related matters regarding your property investments. Contact us today for a free consultation on 0330 433 2927.

Tax laws are always changing, so don’t worry if you already own a buy-to-let property. At John Charcol, we’re offering all buy-to-let owners and property investors the opportunity to call us for a review of your situation. You can call our experts for free on 0330 433 2927.

Our advisers can assess your portfolio and help you decide whether:

Now Is the Right Time to Remortgage 

We can help you make sure you’re on the best rate possible to maximise your rental yield. Our experts can advise you on rates from across the market.

You Could Benefit from Becoming a Company 

Corporation Tax currently stands at 25% (2023/24). Our partners can look at your investment and see if you should consider converting to a company.

You’re Tax-Efficient 

We can work with your tax adviser, or recommend one, to review whether you’re making the most of your allowances.