Buy-to-let landlords are facing various challenges in running their business as they grapple with new legislation with regards to tax. Here, we try to break down the new rules coming into effect this year and beyond, in a bid to help landlords gain a better understanding of their finances.
Buy-To-Let Income Tax
Anyone in business will know that your personal allowance is the amount you are able to earn before you start paying income tax. The rate is currently £12,570, which has been frozen until 2028. For the years 2023 to 2024, landlords will pay 20% tax on buy-to-let income between £12,571 and £50,270. You will then pay 40% on your profits for a rental income of £50,271 or above. An additional rate of 45% applies to incomes of £125,001 and over.
Capital Gains Tax
As of April 2023, the annual capital gains-tax allowance was reduced to £6,000. If you sell your rental property, you will therefore pay more in capital gains tax because the threshold has been lowered significantly. Reports predict that the average landlord’s bill will rise by more than £23,000 this year.
Since the buy-to-let mortgage interest tax relief was reduced, many landlords have transferred ownership of their properties to limited companies, so that they pay corporation tax instead of completing a self-assessment. How much corporation tax is paid is based on the company’s annual profits. It starts at 19% if your profits are under £50,000.
Making Tax Digital
Maxing Tax Digital is the government’s initiative to digitalise all tax returns, which is expected to come into effect in 2026. This means that landlords who earn more than £50,000 per year will have to submit their tax return using the new software from April 2026. Landlords who earn between £30,000 and £50,000 will need to wait until the following April. The situation remains unclear for those earning under £30,000 per year.
A stamp duty cut was announced in September 2022’s mini-budget, increasing the threshold from £125,000 to £250,000. A flat stamp duty rate of 3% applies to all purchases of up to £250,000, giving landlords buying cheaper properties the opportunity to save on tax. The stamp duty rate is expected to be increased again in March 2025.
Higher mortgage costs for landlords are making it harder to remain profitable. Landlords with fixed buy-to-let mortgage deals have seen their monthly costs soar. The expectation is for mortgage rates to gradually fall, but it is unlikely that they will reach their pre-mini-budget levels for some time. As a result, many landlords have had no option but to increase rental rates.
Alongside the new tax laws, landlords are also facing regulation changes concerning Minimum Energy Efficiency Standards and Evicting Anti-Social Tenants. The former anticipates that all rental properties in England and Wales will require an EPC rating of C or above unless they are exempt. It continues to be debated in parliament, so there is still a way to go before this law is passed.
We are also awaiting details of the Renters’ (Reform) Bill, which will give renters new rights to challenge landlords on rent hikes and substandard homes. A ban on Section 21 evictions under this bill will make it difficult for landlords to terminate tenancies without giving a valid reason.
Given the current state of play, some landlords are choosing to sell up, whilst others are adapting their business models to ensure long-term profitability. If you would like any help and advice on building a sustainable buy-to-let business, please call our team on 01609 773 748