Buy-to-let mortgages and tax implications | WIS Mortgages
Buy-to-let mortgages and tax implications image

Buy-to-let mortgages and tax implications

Buy-to-let mortgages differ from mortgages for your own personal residence. Becoming a landlord is similar to conducting a business. Properties are purchased with the intention of gaining rental income and achieving capital appreciation.

Capital Gains Tax

Capital Gains Tax is imposed on gains made when a buy-to-let property, business premises, land or inherited property is disposed of or sold.

If all gains in a year are under the tax-free allowance, there won’t be any Capital Gains Tax payable.

Stamp duty

The Chancellor has proposed an extension up to June 2021. To support the transition, purchases will be free from tax up to £250,000 until September 2021. From October 2021 the nil rate band for stamp duty will return to £125,000. It is important to note that in England and Northern Ireland people have to pay a 3% surcharge on stamp duty fees for buy-to-let properties and second homes.

In Scotland, people purchasing buy-to-let properties and second homes will pay a 4% surcharge on the Land and Buildings Transaction Tax, which varies depending on which tier the property falls into.

Stamp duty calculations can be done using our calculator .

Limited company BTL

Trading property through a limited company is subject to Corporation Tax at 19%. Withdrawing dividends from the company will be taxed at Income Tax rates of 7.5% for basic rate tax rate payers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers.

Purchasing a property through a company allows you to qualify for 100% relief on mortgage interest. When properties are sold through the company, any gains are liable to 19% Corporation Tax.

Limited company BTL vs personal route

You can purchase properties through a limited company or through the personal route and each has its own advantages and disadvantages.

The main advantage of purchasing property through a company is the tax savings it offers, as mentioned above.

If a property is purchased through the personal route, any profits made will be taxed based on your Income Tax band. 

Up until the 2016/2017 tax year, landlords were able to deduct mortgage interest and other allowable costs from rental income. From April 2020, no mortgage expenses may be deducted from rental income. However, landlords are eligible to receive a 20% tax credit on mortgage payments.

This would be a disadvantage to higher rate taxpayers, who received 40% tax relief under the old system. Also, since the income used to pay the mortgage will also be declared as income, there is a greater possibility an individual will be pushed into a higher tax bracket.

However, those concerns will be eliminated if property investments are made using the limited company route. However, mortgage rates for limited companies will be higher than the personal buy-to-let rates, which might erode the tax relief benefits.

Property owners can earn up to £1,000 rental income tax free. This property allowance can’t be claimed against income from letting a room in the main residence. This allowance will apply for Class 4 National Insurance contributions.

Since individual circumstances can differ, it is always recommended that you discuss tax implications with a specialist tax adviser.

How can WIS help you?

At WIS we look at the whole of the market and select the most suitable deal based on client priorities and circumstances. We discuss the individual’s circumstances with business development managers when it is required and strive to obtain the most suitable deals.

As a mortgage is secured against your home or property, it could be repossessed if you do not keep up the mortgage repayments.

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