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What Tax Do You Pay on Buy-to-Let Properties? (2024) | Redmayne Smith

Written by Redmayne Smith | Sep 16, 2024 7:08:29 AM

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:

This article will provide a comprehensive overview of the tax you pay on buy-to-let properties, helping you maximise profits and minimise tax liabilities.

Buy-to-Let Tax Explained

Income Tax: Maximising Your Rental Income 

When it comes to income tax, you have two main options: purchasing the property in your own name or through a limited company. 

Purchasing as an individual:

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:

  • Basic Rate(20%): £12,571 - £50,270
  • Higher Rate (40%): £50,271 - £125,140
  • Additional Rate (45%): Over £125,140

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.

Purchasing Through a Limited Company:

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:

  • 19% for profits up to £250,000
  • 25% for earnings over £250,000

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:

  • Full Mortgage Interest Deduction: This allows you to deduct all mortgage interest as a business expense, dramatically reducing your taxable profits.
  • Flexibility in Reinvesting Retained Profits: Grow your portfolio more efficiently by reinvesting your earnings into new properties without immediately incurring additional personal tax liabilities.
  • Avoidance of an Additional 3% Stamp Duty Land Tax (SDLT): By structuring your investments through a company, you can bypass this surcharge, making property ownership more cost-effective and enhancing your overall investment strategy. 

Buy-to-Let Capital Gains Tax (CGT): Protecting Your Profits

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:

  • Basic Rate Taxpayers: 18% on capital gains.
  • Higher and Additional Rate Taxpayers: 28% on capital gains.

However, you can reduce your CGT liability by deducting certain allowable expenses, such as: 

  • Solicitor fees
  • Estate agent fees
  • Costs of advertising the property
  • Stamp Duty Land Tax (SDLT)
  • Any losses made upon the sale of the property. 

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. 

Inheritance Tax (IHT): Securing Your Legacy 

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.

Invest With Us!

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.