Buy-to-let landlords in the UK face several taxes: income tax on rental profits, stamp duty surcharge on purchase, and capital gains tax on sale.
Rental income is added to your other income and taxed at your marginal rate. If you are a basic rate taxpayer and receive £10,000 in rent (after expenses), you pay £2,000 in income tax. A higher rate taxpayer pays £4,000 on the same rental income.
Allowable expenses that reduce your taxable rental income include letting agent fees, maintenance and repairs (but not improvements), insurance, accountancy fees, advertising for tenants, ground rent and service charges, council tax and utility bills (if you pay them), and travel to the property for maintenance.
Mortgage interest relief changed significantly in 2020. You can no longer deduct mortgage interest from rental income. Instead, you receive a 20% tax credit on mortgage interest payments. This means higher rate taxpayers effectively pay more tax on rental income than they did before the change.
For example, with £15,000 rental income and £8,000 mortgage interest: you are taxed on £15,000 at your marginal rate (say 40% = £6,000), then receive a 20% tax credit on £8,000 = £1,600 back. Net tax: £4,400. Before the change, you would have been taxed on just £7,000.
When buying a buy-to-let property, you pay a 5% stamp duty surcharge on top of standard rates. On a £250,000 property, the surcharge alone is £12,500 on top of the standard £2,500 SDLT.
When selling, capital gains tax is 18% (basic rate) or 24% (higher rate) on residential property. You must report and pay within 60 days of completion.
Use our capital gains tax calculator and stamp duty calculator for exact figures.