Buy-to-Let Tax Explained
Owning rental property means paying Income Tax on the profit, with mortgage interest relief restricted to the basic rate (20%). Selling triggers Capital Gains Tax at 18% or 24%.
What is Buy-to-Let Tax?
Buy-to-let tax covers the Income Tax you pay on rental income from property you let out, and the Capital Gains Tax when you sell. Since April 2020, mortgage interest can no longer be deducted from rental income. Instead, you receive a tax credit at the basic rate (20%) of your finance costs. This change particularly affects higher rate taxpayers who previously deducted mortgage interest at 40%.
How it works
Rental income is added to your other income (salary, pension, etc.) and taxed at your marginal rate: 20%, 40% or 45%. You can deduct allowable expenses such as letting agent fees, repairs, insurance, council tax (if you pay it) and ground rent. Mortgage interest is not deductible, but you get a 20% tax credit on the full interest amount. When you sell a buy-to-let property, Capital Gains Tax applies at 18% (basic rate) or 24% (higher rate) on the gain above your £3,000 annual exemption.
Real example
Jo earns £45,000 from employment and receives £12,000 in annual rent. Her mortgage interest is £6,000 and other expenses total £2,000. Taxable rental profit: £10,000 (£12,000 minus £2,000 expenses, but not mortgage interest). She pays 40% tax on the profit (£4,000) but receives a 20% tax credit on mortgage interest (£1,200). Net tax on rental income: £2,800.
Who does this affect?
Anyone who owns and rents out residential property in the UK. Around 2.7 million individual landlords operate in the UK. The mortgage interest restriction has the biggest impact on higher rate taxpayers with large mortgages relative to their rental income. Some landlords have moved properties into limited companies to avoid the restriction.
HMRC source
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