Landlord tax explained
Landlord tax comes in various forms. From Stamp Duty Land Tax at the point of purchase, to Capital Gains Tax at the point of selling, taxation is a common theme of buy-to-let property ownership. This guide will explain the different types of landlord tax payable and help you calculate what your tax liability might be.
In this guide
- How much tax do landlords pay?
- Do landlords pay council tax when property is empty?
- Do you have to pay tax when selling a rental property?
- Capital Gains Tax changes – 2023
- Who pays council tax, tenant or landlord?
- What can landlords claim tax relief on?
- Income tax and rental income
- Landlord tax rates and allowances
- Allowable expenses
- National Insurance rates
- Stamp Duty rates
- Calculating your profit and loss
How much tax do landlords pay?
How much tax landlords pay will depend on several factors.
- Stamp Duty will be payable when a buy-to-let property is purchased. Landlords are required to pay a higher rate of Stamp Duty than owner-occupiers buying a main home.
- Income Tax will be payable on any profits from monthly rental income. What rate of Income Tax landlords are required to pay will depend on their income bracket.
- Capital Gains Tax will be payable on any profit made when a property is sold.
Do landlords pay Council Tax when property is empty?
Yes, council tax is payable whether a property is occupied or not. If a rental property is empty, the landlord will be responsible for paying Council Tax.
Do you have to pay tax when selling a rental property?
When you sell a rental property, you will be required to pay Capital Gains Tax on any profit you make. If you plan on selling and currently have tenants be sure to read our guide on selling with sitting tenants.
How much you have to pay will depend on which tax band you are in. Those who earn up to £50,270 will pay 18% Capital Gains Tax, and those earning £50,271 or more will be required to pay 28% Capital Gains Tax.
There are some deductions you can make when calculating your profit, such as legal and estate agency fees from both the purchase and sale, as well as the cost of any major improvement work.
You can use this Capital Gains Tax calculator to work out how much you will need to pay.
Capital Gains Tax changes – 2023
As of April 2023, the Capital Gains Tax allowance is reduced from £12,300 to £6,000. In April 2024 the Capital Gains Tax allowance will drop to £3,000.
Who pays council tax, tenant or landlord?
The tenant will usually be responsible for paying council tax.
If the property is a House of Multiple Occupancy (HMO), and all residents pay individual rent to the landlord, the landlord may become responsible for paying the council tax. However, in this circumstance it’s likely that the council tax cost will be passed on to tenants through their rent payments.
What can landlords claim tax relief on?
Mortgage interest – Historically, landlords were able to deduct mortgage interest payments from rental income to reduce their tax bill. This changed in 2020 and landlords now receive a tax credit worth 20% of their mortgage interest costs.
Repair and maintenance costs – You can claim tax relief on property repairs and maintenance. More significant improvements and renovations are not permissible for Income Tax relief, but can usually be claimed against Capital Gains Tax at the point of sale.
Replacement of domestic items – If you need to replace white goods, you may be able to landlord tax break on the cost of the new items. You’ll need to ensure you deduct any money you make from selling or disposing of the old item.
Legal fees, management fees, estate agency fees and accountancy fees – You’re not able to claim Income Tax relief on legal fees associated with buying the buy-to-let property, but you may be able to claim relief on other legal fees associated with the property (eg. extension of property lease or tenant eviction). You may also be able to claim relief on some other business costs such as accountancy fees, property management fees and estate agency fees.
Council Tax – If your rental property is vacant, you are permitted to claim relief on any Council Tax you pay.
Service charges – If you’re required to pay service charges for the maintenance of any communal areas, you may be able to claim tax relief on the fees payable.
Travel expenses – If you need to travel to the property to carry out maintenance or deal with issues with your tenants, you can claim relief on travel expenses.
Property Income Allowance – If your rental income is relatively low, you have the option of claiming a Property Income Allowance of £1,000 from your rental income. If you choose to claim this, you’re unable to claim any other expenses or tax relief, so it’s important to weigh up your options and decide which is the most appropriate route for your personal circumstances.
Income tax and rental income
Any profit you make from rental income will be liable to Income Tax.
Your rental income will be added to any other personal income you have when calculating tax owed. Any income within the current personal tax allowance of £12,570 will be tax-free. Income between £12,571 and £50,270 will be charged at the basic rate of 20%. Any income between £50,271 and £150,000 will be charged 40% tax, with anything above £150,000 being taxed at 45%.
Landlord tax rates and allowances
|Tax bracket||Income (from rent or other means)||Rate of tax|
|Personal allowance||Up to £12,570||0%|
|Basic rate||£12,571 – £50,270||20%|
|Higher rate||£50,271 – £150,000||40%|
|Additional rate||Over £150,000||45%|
Capital expenses (anything that increases the property’s value) can’t be used against your Income Tax but may be permissible against Capital Gains Tax at the point of sale, so it’s important to keep thorough records of any capital expenses.
Allowable expenses include:
- Building and contents insurance
- Letting agents fees
- Accountancy fees
- Mortgage interest
- Ground rent and service charges
- Replacement windows and doors
National Insurance rates
If you make a profit of £6,725 or more from your rental income, you may be required to pay National Insurance in addition to any income tax payable.
If your rental income is your only income, and you make less than £6,725 profit, you may not be required to pay National Insurance but can choose to do so in order to qualify for a full State Pension.
Stamp Duty rates
Buy-to-let investors are required to pay 3% more Stamp Duty than owner-occupiers buying a primary residence.
|Owner-occupier main residence||Buy-to-let purchase|
|First £0-£250,000 of purchase price||0%||3%|
|Amount paid between £250,001 and £925,000||5%||8%|
|Amount paid between £925,001 and £1.5million||10%||13%|
|Anything paid over £1.5million||12%||15%|
If you want help working out exactly how much Stamp Duty you’ll need to pay, you can use a handy buy-to-let Stamp Duty calculator like this one.
Calculating your profit and loss
If your rental property is making a profit, you’ll need to complete a self-assessment tax return.
Although there is no requirement to declare any loss to HMRC (unless you are already required to complete a self-assessment tax return), you may wish to do so, as you may be able to carry the loss forward against any future profits for the same property business.
The buy-to-let landscape has changed significantly over the last decade, and landlord taxes have increased. This, alongside higher mortgage interest rates, has made buy-to-let a far less attractive option for landlords and led to many selling rental properties. Many more are considering their long-term prospects carefully and changing their portfolio strategy to adapt to changing market conditions, such as an increase of surveyors down valuing property.
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- What is a mortgage prisoner and how do you break free?
- Top causes of damp in UK homes
- The cost of house clearance when selling a property in 2023
- How to sell a flat quickly 2023
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