The UK has seen a rapid increase in “buy to let” investments during the last few decades. Motivated investors buy properties (outright or through mortgage arrangements) to earn regular rental income from residential tenants. Properties are also increasing in value, and these gains are being sought after by ambitious investors.
What is the most tax-efficient way to buy to let?
The tax implications of rental income, or income from flipping properties, differ depending on the type of letting undertaken and the chosen structure. The most common method of purchasing buy to let properties is doing so personally, or opening a limited company (referred to as a ‘special purpose vehicle‘, or simply a ‘SPV’).
Fusion Business Services provide specialist accountancy for buy to let landlords. Our service will help you maximise your return, while ensuring you remain compliant with HMRC and UK tax law. Please call our professionals on 0800 2294020 or request a free consultation at a time that suits you.
Buy these personally or through a limited company (SPVs)?
It depends on several factors, such as.
- Who else will the property be owned with?
- Is there a short or long-term plan?
- Whether investor is tax resident in the UK? And where will the investor be tax resident when they come to sell the property?
Keep reading and find out more about the best ways to buy property to let.
Personally owned buy to let properties
If a property is based in the UK, an individual will pay income tax on their rental profits at tax rates ranging from 20% – 45%, which depends on the level of their other income within the same tax year. This tax is charged regardless of where they live. UK-tax residents are generally entitled to an annual tax-free allowance to be set against their rental income.
As for gains arising on the sale of rental property – individuals are usually entitled to an annual exemption unless they are non-UK domiciled and claiming the remittance basis. Non-tax residents may need some careful consideration, especially in the years of emigration and immigration.
From April 2021, mortgage interest relief is restricted where the natural person owns properties. This means it could affect investors into either high rate taxes, which may also impact their universal credit availability.
Non-resident individuals disposing of UK residential property are still subject to Non-Resident Capital Gains Tax (NRCGT) at the higher rates for residential property gains (18% / 28%).
Since April 2019, gains on the disposal of any UK commercial property held by a non-resident ‘person’ are taxable. The property is rebased to its market value on 5 April 2019 when calculating the gain. An election can be made to use the total gain (or loss) since acquisition. Gains of non-resident individuals and certain trustees are subject to Capital Gains Tax (CGT) at the standard rates (10% / 20%).
Buy to let properties owned through a limited company (Special Purpose Vehicle – SPV)
UK resident companies pay corporation tax (both on rental income and on the disposal of assets). The current corporation tax rate is currently 19%. However, it’s vital to remember that the government is planning to increase tax rates to deal with the economic recovery after the pandemic.
Companies can claim tax relief on full mortgage interest costs.
From 6 April 2020, non-UK resident companies that carry on a UK property rental business or have other UK property income will be liable to corporation tax (currently 19-25% depending on your companies profits) rather than income tax (at the basic rate of 20%).
Since April 2019, all residential property gains realised by non-resident companies have been brought into the corporation tax regime.
Non-resident Companies making gains on commercial properties also pay corporation tax.
Annual Tax on Enveloped Dwellings (ATED)
With high-value properties kept under the limited company structure, there is an anti-avoidance provision. As such, companies are required to submit Annual Tax on Enveloped Dwellings (ATED). ATED is an annual tax payable mainly by companies that own UK residential property valued at more than £500,000.
You’ll need to complete an ATED return if your property:
- is a dwelling.
- is in the UK.
- was valued at more than:
- £2 million (for returns from 2013 to 2014 onwards).
- £1 million (for returns from 2015 to 2016 onwards).
- £500,000 (for returns from 2016 to 2017 onwards).
- is owned completely or partly by a:
- company.
- partnership where any of the partners is a company.
- collective investment scheme – for example a unit trust or an open ended investment vehicle.
Please note that returns must be submitted on or after 1 April in any chargeable period.
There are reliefs and exemptions from ATED. For example, genuine property rental businesses have relief available from the charge. The legislation states that a company must meet two conditions to be a qualifying property rental business:
- The business must be a property rental business as defined in CTA2009.
- It must be run on a commercial basis and with a view to a profit.
You can find more about ATED charge on the official government website.
Stamp Duty
You must pay Stamp Duty Land Tax (SDLT) if you buy a property or land over a certain price in England and Northern Ireland.
Non-resident Companies making gains on commercial properties also pay corporation tax.
Residential Properties
You usually pay SDLT on increasing portions of the property price when you buy residential property, for example a house or flat.
SDLT only applies to properties over £250,000.
The amount you pay depends on:
- When you bought the property
- How much you paid for it
- Whether you’re eligible for relief or an exemption
Use the government’s SDLT calculator to work out how much tax you’ll pay.
| Property or lease premium or transfer value | SDLT rate |
|---|---|
| Up to £250,000 | Zero |
| The next £675,000 (the portion from £250,001 to £925,000) | 5% |
| The next £575,000 (the portion from £925,001 to £1.5 million) | 10% |
| The remaining amount (the portion above £1.5 million) | 12% |
You may be required to pay 3% on top of these rates if you own another residential property.
Non-Residential Properties
You pay Stamp Duty Land Tax (SDLT) on increasing portions of the property price (or ‘consideration’) when you pay £150,000 or more for non-residential or mixed (also known as ‘mixed use’) land or property.
Non-residential property includes:
- Commercial property, for example shops or offices
- Forests
- Property that isn’t suitable to be lived in
- 6 or more residential properties bought in a single transaction
- Agricultural land that’s part of a working farm or used for agricultural reasons
- Any other land or property that is not part of a dwelling’s garden or grounds
A ‘mixed’ property is one that has both non-residential and residential elements, for example a flat connected to a shop, office or doctor’s surgery.
The following SDLT rates apply to non-residential properties:
| Property Price | SDLT Rate |
| Up to £150,000 | 0% |
| £150,001 – £250,000 | 2% |
| £250,000 + | 5% |
The following rules apply in regards to Stamp Duty:
- A 3% surcharge is applicable to the properties bought through SPV’s
- Relief is available for first-time buyers (Not applicable to the SPV’s)
- More guidance is available on the government’s website on Stamp Duty Land Tax and relief.
Fusion Business Services are experts in Landlord Accountancy
For a free and impartial consultation or to discuss how to set up and manage your property portfolio, please give our expert consultants a call on 0800 2294020, or schedule a free consultation for a time that suits you here. We also provide a landlord accountancy service for those who would prefer not to have an SPV (landlord accountancy with self-assessment).
