How buy-to-let investors can reduce tax due on their income

Plus, are you making the most of your buy-to-let?

The buy-to-let landscape is ever changing – so you’ll need to be savvy to stay ahead of the game…

To help you cut through the noise of income tax as a landlord, we’ve collated some key takeaways for you to be aware of, with information on how you could optimise your investments for tax. This is for guidance purposes only and any decisions should be discussed with your accountant or a tax specialist.

What are the current income tax rates?

The current personal allowance for income tax in England, Scotland and Wales is £12,570 for those who have one job and one pension, and will be frozen at this level until 2028.^ Note that your tax can change depending on your circumstances. For instance, the personal allowance reduces when your net income exceeds £100,000.

In England and Wales, Landlords must pay the basic rate (20%) on any income between £12,571 and £50,270. Once they pass this threshold, the tax rate becomes 40%. Any income over £125,140 falls under the additional rate band, which means that the income tax rate is 45%.^

Scotland’s income tax bands differ, as shown below: 
 

Taxable income Band Tax rate
£12,571 to £14,732         Starter rate  19%
£14,733 to £25,688 Scottish basic rate 20%
£25,689 to £43,662 Intermediate rate 21%
£43,663 to £125,140 Higher rate 42%
Above £125,140 Top rate 47%
Source: https://www.mygov.scot/income-tax-rates-and-personal-allowances

What tax changes do landlords need to be aware of?

  • Since April 2020, mortgage costs may not be deducted from your rental income. Instead, landlords will now receive a tax-credit, based on 20% of the mortgage interest payments.
  • Landlords will benefit from the increase to the nil-rate threshold for stamp duty tax, which doubled from £125,000 to £250,000 in England in 2022, although the 3% surcharge on additional properties remains in place. This means that if you're buying a buy-to-let property for £250,001, your stamp duty bill has been immediately cut from £10,000 to £7,500 – a potential saving of £2,500 from what it would have been at the previous threshold level. 

What were the changes to corporation tax?

Since April 2023, corporation tax increased from 19% to 25% for those with annual profits of more than £250,000, which falls under the Main Rate. However, landlords with profits below £50,000 will remain in the 19% rate, and landlords with profits between £50,000 and £250,000 will also pay the Main Rate, but see their rate gradually increase, as it will be reduced by marginal relief.†  

What can you do to protect your investor profits?

Here are some little-known expenses that you can claim back relating to your buy-to-let property…

What expenses can I claim back?

Many landlords are unaware that they can claim back for expenses such as the petrol cost of travelling between their rental properties and phone calls or texts sent in connection with a property. It is also possible to claim back the cost of subscriptions to property investment magazines, plus money spent on advertising the property, as well as legal and accountancy fees connected to the buy-to-let.

The types of cost landlords can claim vary according to the type of property. The options are residential properties, furnished holiday lettings and commercial properties.

These allowable expenses are the costs landlords incur to run their rental properties. For residential properties these can include, but aren’t limited to:

  • Letting agent fees
  • Building and contents insurance
  • Property maintenance and repair costs (excluding improvements)
  • Utilities
  • Council tax

As a landlord, you may also be able to claim tax relief on the cost of replacing domestic items, such as beds, sofas, fridges, etc.**

For a full list, visit the Government website, as other allowable expenses may be included for furnished holiday lets and commercial lettings.

Claim back for void periods

If, as a landlord, you’ve struggled to find any occupants for your property, you may be able to also claim back some of the costs needed to cover bills on your self-assessment tax return.

Move properties into a company 

Another option for property investors would be to move their properties into a company structure, which could work out to be more tax efficient. In this way, a property investor is essentially selling the home to their new company and so, as director of the latter, they would typically have to pay stamp duty at the higher rate on the purchase. The tax paid on a limited company is likely to be a greater benefit to higher rate taxpayers when compared to basic rate taxpayers. 

However, there may be other costs associated with setting up and running a limited company, including any managerial obligations and ongoing costs that you should consider, so research this option well before taking any steps towards it.

Use all of the reliefs available to you when selling your buy-to-let

These could include estate agents’ and solicitors’ fees, stamp duty and also surveying and valuation costs. You can even claim back money spent on the property during the renovation. Someone who made £15,000 in capital gains and spent £5,000 on a loft conversion, for example, would not have to pay any tax as that would bring the total gain to £10,000 which is less than a person’s annual allowance of £12,300. It's worth noting that the capital gains annual allowance is moving down from £12,300 to £6,000 in 2023-24 and then again to £3,000 in 2024-25

The information here is for guidance. No responsibility is accepted by us for reliance on it. You should always obtain professional advice before making any decision relating to property, taxation or financial planning. Prices, numbers and projections are correct at time of press and are for illustration only.

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Sources:
*https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income
**https://www.gov.uk/renting-out-a-property/paying-tax
^Income Tax Policy Paper ; https://www.mygov.scot/income-tax-rates-and-personal-allowances
†https://www.gov.uk/government/publications/rates-and-allowances-corporation-tax/rates-and-allowances-corporation-tax
MKT/UKON/120124