Buy-to-let properties can be an excellent investment opportunity for those looking to generate income through property ownership. However, there are various tax implications to consider before investing in a buy-to-let property. In this article, we will discuss whether you are required to pay taxes on your buy-to-let property in your personal name and the tax implications you should be aware of.
Firstly, if you own a buy-to-let property in your personal name, you will be subject to income tax on the rental income received from the property. The rental income will be treated as part of your overall income and taxed at the applicable tax rate. It is worth noting that the rental income received from the buy-to-let property will be subject to income tax even if it is your only source of income. Here at Aventine Property, we offer leeds sourcing services to clients.
The tax rate you will be required to pay will depend on your total taxable income, including the rental income from the buy-to-let property. The tax rates for the 2021-2022 tax year are as follows:
- Personal Allowance: Up to £12,570 – 0%
- Basic Rate: £12,571 to £50,270 – 20%
- Higher Rate: £50,271 to £150,000 – 40%
- Additional Rate: over £150,000 – 45%
If you are a basic rate taxpayer, the rental income from your buy-to-let property will be added to your total taxable income, and you will be taxed at the basic rate of 20%. If you are a higher or additional rate taxpayer, you will be required to pay tax at the higher or additional rate.
It is also worth noting that there are several expenses that you can deduct from your rental income to reduce the amount of tax you need to pay. Some of the deductible expenses include:
- Mortgage interest payments
- Council tax and utility bills
- Maintenance and repairs
- Letting agent fees
- Insurance
However, it is important to note that changes were made to the tax treatment of mortgage interest payments in April 2017. Since then, mortgage interest payments can no longer be deducted in full from your rental income. Instead, you will receive a tax credit of up to 20% of your mortgage interest payments, which will be deducted from the tax you owe.
Aside from rental income, there are other tax implications to consider when owning a buy-to-let property in your personal name. For example, if you sell the property, you will be required to pay capital gains tax on any profit made from the sale. Capital gains tax is calculated based on the profit made after deducting the original purchase price, any capital improvements made to the property, and the costs associated with selling the property. further details here on how to work out Income Tax when you buy to let property.
The tax rate for capital gains tax depends on your overall income and the profit made from the sale. The current tax rates for the 2021-2022 tax year are as follows:
- Basic rate taxpayers: 18%
- Higher rate taxpayers: 28%
It is also worth noting that there is an annual capital gains tax allowance, which is currently set at £12,300 for the 2021-2022 tax year. This means that you will not be required to pay capital gains tax on any profit made from the sale of a buy-to-let property if the profit is below this threshold.
In addition to income tax and capital gains tax, there may also be other tax implications to consider when owning a buy-to-let property. For example, if the property is located in Scotland, you may be required to pay Land and Buildings Transaction Tax (LBTT) when purchasing the property. If the property is located in England or Northern Ireland, you may be required to pay Stamp Duty Land Tax (SDLT) when purchasing the property.