Investing in buy-to-let properties has become an increasingly attractive option in the UK, offering the potential for steady monthly income and long-term capital growth.
If you’re considering entering the buy-to-let market, it’s crucial to understand the various taxes that come with property investment. These include:
When it comes to income tax, you have two main options: purchasing the property in your own name or through a limited company.
If you choose to purchase your buy-to-let property as an individual, you’ll be liable for income tax on the rental income you earn. The 2024/25 rates are:
For instance, if you earn £23,500 from your property and have a salary of £40,000, you’ll fall into the higher rate tax bracket, paying 40% on your rental income. This tax must be reported and paid annually through a Self Assessment tax return.
Alternatively, purchasing a property through a limited company can be a more tax-efficient option. Rental income earned through a company is subject to Corporation Tax, which is typically lower than personal income tax rates. As of 2024, Corporation Tax rates are:
Additionally, mortgage interest can be fully deducted as a business expense, potentially leading to significant tax savings. As a result, purchasing property through a limited company has become an incredibly appealing option for many investors.
Additional benefits of investing through a limited company include:
When you eventually decide to sell your buy-to-let property, any profit made will be subject to Capital Gains Tax. The current CGT allowance is £3,000 (as of August 2024). Beyond this, gains are taxed at:
However, you can reduce your CGT liability by deducting certain allowable expenses, such as:
If your property is held within a limited company, CGT is replaced by Corporation Tax on the gains, which may offer further tax efficiencies. Moreover, your business may qualify for Business Asset Disposal Relief, which can reduce CGT on the sale of business assets, including properties held within a company.
If you own your investment solely, your buy-to-let property will form part of your estate when you die. This means the property will be liable for inheritance tax rates of 40% if the value of the property exceeds £325,000 (this rate will be frozen until 2027/28).
If you share the ownership of the property with a spouse, each threshold is combined, meaning inheritance tax will only be in effect after £650,000.
Properties held within a limited company can offer more flexible estate planning options, potentially allowing you to mitigate IHT altogether.
Now that you know what tax you pay on buy-to-let properties, why not kickstart your investment journey today?
At Redmayne Smith, we’re dedicated to providing our clients with lucrative buy-to-let investment opportunities across the UK. To find out more about how we can help you achieve long-term wealth, please get in touch. Call us on +44(0)1302 898807. We can’t wait to witness your journey to financial freedom!
At Redmayne Smith, we provide our clients with a range of off-plan property investment opportunities in some of the UK’s best-performing cities. By investing with us, you’ll benefit from knowing that our team of industry professionals are on hand to offer unrivalled expertise and guidance throughout your time with us.