Landlord Tax Overview

Landlords are subject to various taxes on their rental income and property investments. In this article are the key issues that landlords typically need to consider.

Sole Trader / Partnership vs Limited Company

Landlords operating as sole traders or partnerships must declare their rental income on an annual self-assessment personal tax return and pay income tax. The tax rate applicable will depend on the landlord’s total income and tax band, ranging from 20% to 45%.

Properties purchased by a limited company are subject to Corporation Tax on any profits, ranging from 19% to 25%. Typically, the shareholders of the company will withdraw dividends from the companies’ retained earnings. Dividends are taxed at 8.75% to 39.35% depending on other income.

Property Costs

The costs of managing and maintaining the property can be deducted from gross rental income, this typically includes management fees, insurance, general maintenance, and repairs.

Landlords may also deduct utility costs such as electric, gas, council tax, water and broadband, if this is included in the rent.

Mortgage Interest Relief

Until recently, all landlords could deduct mortgage interest payments from their rental income before calculating their tax liability. However, this relief has been phased out for sole traders and partnerships and replaced with a 20% tax credit based on interest payments.

Limited Companies can continue to claim mortgage interest costs to be offset against profits.

Stamp Duty Land Tax (SDLT)

When purchasing a property, landlords may be required to pay Stamp Duty Land Tax (SDLT).

The rate depends on the property's purchase price and can range from 3% for properties up to £125,000 in value to 15% for properties over £1.5m in value. Buy-to-let properties pay a higher rate of SDLT compared to standard purchases.

SDLT has to be paid within 14 days of completion of the property purchase. It is usually paid by the solicitor on completion.

The amount of SDLT paid is deductible from Capital Gains Tax (CGT) or Corporation Tax liabilities that you may be liable for when you sell the property in the future. 

Capital Gains Tax (CGT)

If a landlord sells a property that has increased in value since they bought it, they may be liable to pay Capital Gains Tax (CGT) on the profit. The rate of CGT will depend on the landlord’s other income and can range from 18% to 28%.

If the property is held by a limited company CGT doesn’t apply. Instead, the company will pay Corporation Tax on any profits from the sale at between 19% and 25%.

Inheritance Tax (IHT)

Landlords need to consider the potential inheritance tax implications of their property investments, particularly if they intend to pass on their assets to heirs.

Inheritance Tax (IHT) applies to buy to let investments exceeding £325,000 (property value minus outstanding mortgage). For a couple this increases to £650,000. Anything above this threshold is taxed at 40%.

IHT does not always apply to properties held by limited companies, dependent on the circumstances.

Summary

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