A Tax Overview For Landlords

A Tax Overview for Landlords

There has been a series of tax changes impacting landlords over recent years. From replacing mortgage interest tax relief with a 20% tax credit, to stamp duty surcharges and the upcoming Making Tax Digital scheme. Landlords need to keep up to date with the changes or have a good accountant to stay compliant and avoid any penalties.

If you’re new to the property business or want to check what the latest landlord tax obligations are, here’s an overview of your main tax requirements:

Income Tax

Landlords pay income tax on the profits made from renting out property. The first £1,000 of rental income is tax free or landlords can deduct allowable expenses from their profits, which is typically chosen when their expenses total more than £1,000 over the year.

Rental profit income tax is payable at the rate that is dictated by the landlord’s tax band, incorporating the annual rental income plus any other income, such as a salary. The current tax rates and personal allowances are used to calculate the tax owed, and landlords are required to submit an annual tax return.

Allowable Expenses

It often works out more tax efficient to deduct allowable expenses from rental income rather than using the £1,000 per year tax relief. Allowable expenses include:

·      Insurance

·      Letting agent fees

·      General maintenance and repairs

·      Council tax, energy bills and water rates (if paid by the landlord)

·      Cost of services such as gardeners or cleaners

·      Accountant’s fees

·      Ground rent and service charges

·      Vehicle running costs associated to the rental business

·      Advertising costs to find new tenants

Mortgage Tax Credit

Historically, landlords could deduct mortgage expenses from their rental income but from 2020, this was replaced with a 20% tax credit on mortgage interest payments.

Stamp Duty

Stamp Duty Land Tax (SDLT) is paid for property purchases in England and Norther Ireland that are over £125,000. The amount of SDLT payable is calculated based on the rates for the property value:

First £125,000 – zero

The next £125,000 (portion from £125,001 to £250,00) – 2%

The next £675,000 (portion from £250,0001 to £925,000) – 5%

The next £575,000 (portion from £925,001 to 31.5m) – 10%

The remaining amount above £1.5m – 12%

These are the standard rates for purchasing properties, with the exception of first-time buyers, who have stamp duty relief and won’t pay SDLT on properties up to £300,000.

However, landlords must also pay a 5% surcharge on top of the standard rate. This surcharge rate was recently increased from 3% to 5%.

Capital Gains Tax

Landlords selling buy-to-let properties usually also have to pay Capital Gains Tax (CGT) on any gains made on the value of the property. For example, if you bought a property for £150,000 and sold it for £200,000, you would have made gains of £50,000, which is taxable.

The current CGT rates are 18% for basic rate taxpayers and 24% for higher rate taxpayers. There are certain costs that can be deducted from the CGT, such as legal and estate agent fees, SDLT on the purchase and capital improvements such as building an extension.

Making Tax Digital

Another tax responsibility that landlords will need to be compliant with is the introduction of the new Making Tax Digital (MTD) scheme. From April 2026, landlords who meet the income requirements will need to submit their tax records digitally.

This is just an overview of the key tax obligations for landlords but if you are not sure about how to calculate your tax returns, it is always best to consult an accountant.