What taxes you pay is determined by your business structure. The four primary structures being:

• Individual or joint personal ownership
• Partnerships
• Limited Liability Partnerships
• Companies

Essentially there are three main occasions when tax is payable. These are:

• Stamp Duty Land Tax when you buy the property
• Income Tax or Corporation Tax when you let the property
• Capital Gains Tax or Corporation Tax when you decide to dispose the property

There is a host of complicated tax rules that landlords need to navigate, therefore it is advisable to seek specialist advice.

Buying a property to rent: Stamp Duty Land Tax

You must pay Stamp Duty Land Tax (SDLT) if you buy a residential property in England and Northern Ireland for more than £250,000.

The tax is different for properties in Scotland and Wales.

You must send an SDLT return to HMRC if you pay more than £40,000 for a property, even if no tax is due. This is due within 14 days of completion along with any tax if there is some to pay.

If you already own a residential property and you buy another, and this property is above £40,000 then an additional 3% surcharge on top of the usual SDLT rates will be due. This additional 3% will also be charged on companies if the property is £40,000 or more or the interest purchased is not subject to a lease which has more than 21 years left.

The SDLT rates are set out below.

If a company acquires a residential property costing more than £500,000 that is not going to be let on a commercial basis then a higher rate of SDLT at 15% will be charged.

There is also a 2% surcharge on residential properties in England and Northern Ireland bought by non-UK residents on or after 1 April 2021. This applies on top of all other SDLT rates.

Letting out your property: Income Tax

If you are an individual or an individual in a partnership renting out property you will be liable to pay income tax on any profits you receive. The rate at which you will pay income tax depends on your total income.

In England, Wales and Northern Ireland, from April 2023, you will be taxed at a rate of 20% on the first £37,700 of earnings above your personal allowance, which is worth up to £12,570 depending on your level of income, 40% on the next £87,440 of earnings, and 45% on any further earnings (note that different tax rates apply to dividend income, pension contributions and gift aid donations can increase the basic rate band, and higher marginal tax rates can apply if a high income child benefit charge arises).

Please note that Scotland has slightly different income tax rates.

The first £1,000 of rental income is tax free. This is known as the ‘Property Allowance’ and is available to every individual, although there are some restrictions when property islet to “connected parties”. This means that if your rental income is £1,000 or less you will not need to declare this to HMRC and no tax will be due.

Alternatively, you can elect to use your property allowance to reduce your rental income instead of claiming expenses. This is only beneficial when the expenses are less than £1,000.

Tax is then due on rental profits after deductions for allowable expenses or the property allowance.

If a loss is made this can be carried forward and used against future profits.

Allowable expenses are items you need to spend money on in the day to day running of the property. They are only deductible when they are incurred ‘wholly and exclusively’ for the rental property/business. These include but are not limited to:

• agent’s fees
• accountancy fees
• insurance
• maintenance and repairs
• utility bills
• ground rent/service charges
• Council Tax
• cleaning / gardening.

Motor expenses can be an allowable deduction, but only when a car journey is undertaken for business purposes such as inspecting the property or meeting the tenants. An individual can elect to use the actual motor expenses or a flat rate expense for business miles travelled.

Loan interest, such as mortgage interest is not allowable as a deduction when calculating property income in respect of residential properties for individuals. Instead, the interest is only eligible for a basic rate tax relief (20%), which is given as a reduction in arriving at the individual’s income tax liability.

However, a company can claim interest on property loans as an allowable expense.

If an individual’s annual rental profit is above £2,500 after allowable expenses or if the rental income is greater than £10,000 before allowable expenses, you must complete a self-assessment tax return.

This will be due on 31 January following the tax year. Therefore, for the year ended 5 April 2023, a self-assessment tax return must be submitted to HMRC by 31 January 2024.

There are different tax rules for furnished holiday lets and commercial properties.

If a company has annual rental profits, these will be subject to a corporation tax charge. Companies with taxable profits of up to £50,000 or less will be eligible for the 19% rate from April 2023 onwards. Companies with profits in excess of £50,000 will pay an effective tax rate of 26.5% on the slice of profits between £50,000 and £250,000 and 25% on profits of £250,000 and over. Where there are groups of companies, or companies under control of the same persons from April 2023, the profit bands will need to be divided by the number of companies to determine the applicable tax rate.

When this is due depends on the size of the company.

Selling or passing on your rental property: Capital Gains Tax

You must pay CGT if you make a profit (gain) when you sell or dispose of a property that is not your primary residence.

However, you do not need to pay tax on gifts to your husband, wife, civil partner or charity.

Private residence relief is available in instances where you sell your primary home or when you sell a property that at some point was your primary home. The amount of relief that can be claimed depends on the amount of time you occupied the property compared to the length of ownership.

CGT is calculated by deducting the base cost from the sales price. You can also deduct legitimate costs such as estate agents’ fees, solicitor’s fees, and cost of improvements.

In some circumstances the market value of the property should be used when working out the gain. For example, when it is sold or gifted to a connected person.

From April 2023, all individuals have an annual exempt amount of £6,000 (reducing to £3,000 from April 2024), therefore any gain above this amount will be liable to CGT.

For residential properties the rate of tax will be either 18% or 28% and this will depend on your other taxable income.

You can also deduct losses made on other assets to reduce your gain.

You must report and pay any CGT on most sales of UK residential property within 60 days, by submitting a residential property CGT return.

Companies selling property will pay corporation tax on the gain. The gain is worked out in a similar way as that for individuals but a company does not have an annual exemption. Companies do not need to report residential property gains within 60 days of completion.

Please get in touch to discuss your individual circumstances if you have further questions.