Reduce Your Tax Bill

Buy to let tax information is often very hard to come by with the required information scattered around various sources fro the inland revenue, hearsay from friends or colleagues or dotted around various websites on the internet. Here we will try to cover the basics and hopefully give some pointers on how to minimise the tax bill from your buy to let investment.

Understand what you have to pay.

There are two main obligations a buy to let landlord has to the tax authorities in the UK (and indeed in most countries):

1. Capital Gains Tax

This is a tax on any gains in the capital value of your buy to let property when you come to sell it. In other words if you buy the buy to let property for £100,000 and sell it 5 years later for £150,000 then you would be liable to pay tax on the profit of £50,000. Following he recently announced changes to a capital gains tax rate of 18%, your tax bill following the sale of this property would be £9,000 (£50,000 x 18%).

2. Income Tax

This is the tax you'll have to pay on the rental income of your buy to let pproperty. For example if you rent the property for £800 per month and the property is let out all year you would be liable to pay taxes on £9,600 (£800 x 12months) income. If yo are a higher rate tax payer your tax bill would be £3,840 (£9,600 x 40%). This obviously can affect the profitability of you buy to let investment significantly so it is important to understand how to minimise this tax bill.

Your can offset expenses such as repairs and maintenance of the property again your income liability (£9,600 in the example above). However the biggest way to reduce your bill is by off settiing the interest on your buy to let mortgage against the income. It is because buy to let mortgage interest (not capital repayments) is tax deductible that the majority of landlords choose to finance their buy to let investments using interest only loans.