:: Stamp Duty Land Tax ::

52 Ways to Save Tax #27

pay less taxAccording to HMRC, there are more than 1.75 million landlords in the UK banking over £14 billion a year in rental income.

If you’re a landlord, then you will have a number of potential tax liabilities on your rental property. In the latest part of our “52 Ways to Save Tax” guide, we look at how you reduce the amount of income you can pay on your buy to let investment.

52 Ways to Save Tax – Part 26: Claim all the expenses on your ‘buy to let’ property

The income that you receive as rent on investment property is taxable. Unless you are set up as a company, you have to declare any rent that you receive as part of your Self Assessment tax return. The tax is then charged in accordance with your own income tax band:

  • 20 per cent for basic rate taxpayers
  • 40 per cent for higher rate taxpayers
  • 45 per cent for additional rate taxpayers

Bear in mind that adding your rental income to your other earnings may push you into a higher tax band.

You can reduce the amount of tax that you pay by deduction certain allowable expenses from your rental income. These expenses include:

  • Council tax and ground rent
  • Buildings insurance on the property
  • Property repairs and maintenance (although large improvements such as an extension are not income tax deductible)
  • Legal, management and lettings agency fees
  • Other related property expenses
  • Interest on buy to let mortgages (see below)

In 2015, the Government reduced the amount of interest tax relief on buy to let mortgages. These changes come into force in April 2017. Prior to April 2017, tax is payable on your net rental income after deducting allowable expenses including mortgage interest. If you pay higher or additional rate tax you can claim tax relief at your highest rate.

However, from April 2020 tax relief can only be reclaimed at the basic rate, whatever rate of tax you pay. These rules are being phased in over 4 years beginning in April 2017.

Reducing the amount of Capital Gains Tax that you pay

If you sell a buy to let property for more than you paid for it then you may be liable for Capital Gains Tax (CGT).

As well as reducing the amount of tax you pay on your rental income, you can also reduce the amount of Capital Gains Tax you pay when you sell the property. Legitimate ways to reduce your CGT bill include:

  • Using your full CGT annual allowance (£11,100 in 2016/17)
  • Carrying over a loss made on the sale of a buy to let property in previous years
  • Deducting solicitors fees
  • Deducting estate agents fees
  • Deducting the costs of advertising the property for sale
  • Deducting stamp duty
  • Deducting any expenditure on ‘capital’ items

There are also certain tax reliefs available. For example if the property was previously your main residence, the gain may be reduced.

What Tax Do You Pay When You Buy A House?

If you are planning to buy a property in the UK then you should be prepared to pay Stamp Duty Land Tax (SDLT) on the purchase.  You pay this tax on the purchase of any house, flat, other building or land above a certain value.

Our guide looks at what Stamp Duty Land Tax is, when you pay it and how much you have to pay.

What is Stamp Duty Land Tax?

SDLT is a tax that you pay on the purchase price of property and land.  It was introduced in December 2003 to replace its predecessor, Stamp Duty.  You may have to pay SDLT when you take on a lease or when you buy a property in the UK.

When is Stamp Duty Land Tax payable?

Generally speaking, you will pay SDLT if you buy a leasehold or freehold property and the purchase price is more than £125,000.

If the property or land you buy is under £125,000, no SDLT will be payable.

If you are a first time buyer then the threshold for paying SDLT is higher.  If you have never owned a flat or house anywhere in the world (including the UK) then you will only pay Stamp Duty Land Tax if the purchase price of the property is over £250,000.  The higher threshold applies for any purchases made between 25 March 2010 and 25 March 2012.

What Stamp Duty Land Tax will I pay?

The amount of SDLT that you pay is dependent on the purchase price of the property:

  • Between £0 and £125,000 – 0 per cent
  • £125,001 to £250,000 – 1 per cent (unless you are a first time buyer in which case the rate is 0 per cent as above)
  • £250,0001 to £500,000 – 3 per cent
  • £500,0001 to £1 million – 4 per cent
  • £1 million or more – 5 per cent

The tax is not staggered.  For example, if you buy for £300,000, you don’t pay 1 per cent on the first £250,000 and then 3 per cent on the remaining £50,000.  You pay 3 per cent of the £300,000 purchase price as SDLT.

What is SDLT Disadvantaged Areas Relief?

If you buy a property in an area that has been designated as ‘disadvantaged’ by the government then you may qualify for Disadvantaged Areas Relief.  This means that you don’t pay any SDLT on a purchase of up to £150,000.

You can determine whether the area you are buying in is deemed ‘disadvantaged’ by checking on the HM Revenue and Customs (HMRC) website.

What if I am buying a ‘zero carbon’ home?

If you are buying a house which has sufficient additional renewable power to cover the average consumption of a property in a year – highly insulated and including renewable energy sources such as solar panels or a wind turbine – you will not have to pay any SDLT on purchases up to £500,000.

Zero carbon homes bought for over £500,000 will have their SDLT bill reduced by £15,000.