Are you a UK tax resident who already has a buy-to-let portfolio in your own name and you’re looking to expand, or are you considering purchasing your first buy-to-let UK property?
If you are a tax resident in the UK, there are several tax-related things that you will need to know before buying an investment property in the UK. Below is our snapshot guide to everything “tax” you should be aware of if you want to invest in UK property personally (the same rules apply if you own an investment property in a partnership of limited liability partnership):
Tax Return
If this is your first time purchasing a buy-to-let property in your personal name, you must report the income and expenses on a Self-Assessment Tax Return (provided your income exceeds the property allowance – see below) and pay tax on the rental profit you make.
Cash Basis or Accrual Basis
The cash basis is the default basis for preparing personal rental income and expenditure calculations. This means you record the income and expenses when the income and expenses are received and paid. If you choose to opt out, you must continue to prepare accounts using the accruals basis. This means you record the income and expenses for the period to which they relate.
Property Allowance
There is a £1,000 property allowance for individuals owning residential property. If your rental income is within the property allowance, you do not need to report this income to HMRC. However, if your income is in excess of the £1,000 property allowance, you can either claim the property allowance as a deduction from your rental income or claim actual expenses. You can’t claim both expenses and the property allowance, but you can decide which deduction is the most beneficial to you.
Restricting finance cost relief for individual landlords
The amount of Income Tax relief individual landlords can get on residential property finance costs (such as mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans) is limited to the basic rate of tax. Note that no income tax relief is available for capital repayments of a mortgage or loan.
This means that individual landlords aren’t able to deduct all of their finance costs from their property income to arrive at their property profits. Instead, landlords will receive a basic rate 20% deduction from their income tax liability for their finance costs.
Cost of replacing domestic items
Individuals can claim a renewal allowance for the cost of replacing domestic items. These are items such as; moveable furniture (sofas, tables, bed frames etc), furnishings (curtains, rugs, carpets etc), household appliances (fridges, freezers, washing machines etc) and kitchenware (utensils, crockery, cutlery etc).
It’s important to note that these items must be replacements (not the initial cost), and the items should be provided solely for the use of the tenants, with the old item no longer being available.
Furnished Holiday lets
From 6 April 2025, the Furnished Holiday Lettings (FHLs) regime was abolished. This means that FHL will be treated as a “normal” rental business and no longer receive the more beneficial tax allowances that they have received in the past.
For existing FHLs that have historical capital allowance pools, these will continue to run until the value of the pool is nil. Mortgage and loan interest will be restricted as mentioned above in restricting finance cost relief for individual landlords. In addition, when disposing of an FHL, they will attract the usual capital gains tax rates at 18% or 24% depending on the level of other income.
Furnished Holiday lets – Joint properties
Before 5 April 2025, the FHL profit could be split in whatever proportion without the need to make a declaration to HMRC. However, where the FHL is held jointly with your spouse and the profit is not split 50:50, a form 17 will need to be submitted after 5 April 2025, along with evidence that the ownership of the property is in unequal shares. Form 17 must be submitted to HMRC within 60 days of signature. It’s important to note that this form can’t be backdated. Therefore, if the property is owned in unequal shares (say 90:10), but you and your spouse have not completed a form 17, you will be assessed on the income and expenses on a 50:50 basis until this form is signed and submitted to HMRC.
It’s worth noting that the above only applies to married couples or civil partners, and a form 17 where you do not wish for the income to be assessed 50:50. Submitting a form 17 isn’t necessary if non-married individuals or civil partners hold the property.
Capital Gains Tax
If you sell one of your individually held investment properties, you will have to pay capital gains tax (CGT) on the profit you make. Each person has a CGT annual exemption which is £3,000 for the current 2025/26 tax year. Therefore, you will only pay CGT if your profit exceeds your annual exemption.
If you are a basic rate taxpayer, you will pay CGT at a rate of 18%. Higher rate and additional rate taxpayers will pay CGT at a rate of 24% in the current 2025/26 tax year.
If you dispose of a residential property, you will need to report the gain to HMRC (and pay any tax due) within 60 days from completion.
In addition, the disposal must be reported to HMRC through a Self-Assessment Tax Return by January 31 following the end of the tax year.
Stamp Duty Land Tax
When you buy a residential property, you may have to pay Stamp Duty Land Tax (SDLT). It applies to residential and commercial properties, including freehold and leasehold property. The rate of SDLT depends on your circumstances and the value of the property.
There are attractive rates for first-time buyers; however, even if you are a first-time buyer and the property is valued under £500,0000, you will have to pay SDLT as the rules don’t apply if the property being purchased is an investment property.
If you already own a residential property, you will pay an additional 3% on top of the standard SDLT rates for properties costing more than £40,000. The rates for additional properties are:
- Up to £125,000: 5%
- £125,001 to £250,000: 7%
- £250,001 to £925,000: 10%
- £925,001 to £1,500,000: 15%
- Over £1.5 million: 17%
SDLT is payable within 14 days of completing the purchase, and this is something your solicitor would normally advise you on.
Making Tax Digital
The Government have announced that in the future, individual landlords must keep digital tax records and submit their rental income and expenses to HMRC on a quarterly basis under Making Tax Digital (MTD). To do this, individual landlords will be required to maintain their rental records digitally.
Your turnover (i.e. your rental income not your rental profit) will determine when you are required to comply with the MTD. Landlords with turnover of more than £50,000 per year must comply with MTD from April 2026. Landlords with turnover of more than £30,000 per year will be required to join the MTD regime from April 2027. Final landlords with turnover of more than £20,000 per year will be required to join the MTD regime from April 2028.
Read more about MTD here.
Company costs
Instead of owning a buy-to-let property personally, the property could be purchased by a limited company. A limited company can claim more expenses, such as the mortgage or loan interest, which can be claimed in full. In addition, you will not be taxed on the rental profit; instead, the company will pay corporation tax. You, as a director/shareholder, will be taxed on the salary or dividends taken out of the company. Please bear in mind that if you transfer any properties into a limited company that are already owned, CGT may be due and SDLT.
It’s also important to note that additional tax charges such as Annual Tax on Enveloped Dwellings (ATED) could also be due if the residential property is more than £500,000.
In addition to holding residential properties in your sole name, there are other structures that can hold residential properties, such as LLPs and trusts.
If you would like more information on this or anything mentioned in this article, please contact either Kay Colliver or your normal BHP contact.
