Buy to Let Tax: Changes and Reliefs in 2021

But To Let Tax

The tax implications and legal obligations of investing in buy to let properties rather than buying a residential home vary to a great extent. Renting a buy to let property is considered similar to running your small business. If you are a landlord earning rental income from buy-to-let properties, you need to know the latest changes and reliefs on buy to let tax in 2021.

Undoubtfully, buy to let is a great way to earn some extra money, however, you need to be aware of the latest regulations and changes related to tax law, bump in interest rate etc. Let’s discuss a few buy to let tax changes and updates in 2021.


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Buy To Let Tax


Buy to Let Tax Rates in 2021

Currently, the capital gains tax allowance has been raised from £12,000 to £12,300 (£6,150 for trusts). It means that whilst selling the second property, you will be getting a more tax-free amount. However, the capital gains tax is higher for landlords. Here is are the tax rates that landlords are entitled to pay:

  • Basic rate taxpayers need to pay 18% on residential property
  • Higher and additional rate taxpayers need to pay 28%

These rates may change as per the government’s announcement in the new tax year (April), so you need to be updated with it on HMRC’s website.


Changes to Capital Gains Tax

Landlords may face a higher tax burden when selling a property due to the freeze on capital gains tax (CGT) allowances. The Office of Tax Simplification (OTS) has called for an increase in CGT to make it in line with the rates of income tax. It means they are going to reduce the CGT allowance and increase the CGT rate.

Although this law hasn’t been implemented yet, you need to be aware of it in the post-pandemic world.


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Tax Reliefs on Buy-to-let Mortgages

In 2021, you are no longer able to take off mortgage expenses from rental income to mitigate your tax bill. Instead, you now get a 20% tax credit on the mortgage interest payments. This rule is not in favour of additional or higher rate taxpayers as with the former method, they were getting 40% tax relief on mortgage payments.

This new system means they’ll be required to show the income that they pay the mortgage on their tax return, taking them into the higher/additional rate tax brackets (as per the earnings from other sources like salary & pension).

To mitigate the impacts of this rule, landlords are establishing limited companies when purchasing a new rental property. This helps them to pay only 19% of corporation tax.


Buy to Let Income Tax Rates 2021

Right now in 2021-22, the personal allowance is £12,570 where you don’t need to pay any tax on the rental income. Over this allowance up to £50,270, 20% retail income is payable. From £50,270 to £150,000 the tax on rental income will be 40%. And if your rental income falls under the additional rate threshold of over £150,000, you’ll be paying 45% of the tax.


One-off Wealth Tax Proposal

To recover the economy after the Covid-19 crisis, the government is considering a one-time wealth tax. It is a tax on all types of assets, including the property. Earlier in 2020, Wealth Commission had proposed an additional 1% for the people having assets over £500,000 (£1 million for a married couple). Here debts related to mortgages on the property won’t be deductible though.

However, this proposal was not included in the latest Autumn Budget.


Quick Sum Up

Understanding buy to let tax regulations and changes are crucial for landlords to learn how they can earn a sizable profit after deducting all the taxes. They need to consider the main taxes that are payable on the residential property: Stamp Duty land Tax (SDLT), Inheritance tax(IT) and Capital Gains Tax (CGT).

To calculate how much tax is payable on their rental income, they need to work out their rental income, tax-deductible costs, mortgage interest, pre-tax profit, taxable mortgage interest, tax credit rate & amount, taxable profit. Additionally, landlords can benefit from allowable expenses to reduce their taxes. They also need to know the updates, schemes and reliefs available after the outbreak of coronavirus.


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Disclaimer: This blog provides basic information on the latest updates and changes in buy to let tax.

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