Tax rates and changes for Buy To Let properties 2023
Tax changes are nothing new in the buy-to-let rental sector and although 2022 saw a lot of changes in government several things remained the same. Below is a summary of the major tax areas that landlords have to consider.
1. Stamp Duty – this remained unchanged going into 2023. The 3% surcharge for buying a second residential property remains in place.
2. Capital Gains Tax – Although CGT rates of taxation have remained the same, the personal allowance was reduced from £12,300 to £6,000 to commence April 2023 and from April 2024 it will fall again to £3,000. This will make it more expensive for some landlords to sell a rental property going forwards – especially if it is in their own, personal names.
3. Income Tax – thanks to a previous Conservative government rental income is now added to personal income and taxed under income tax guidelines. As a result not only are many landlords paying more in tax than before, but some have even found themselves in higher marginal tax brackets once the rental income was added to other incomes.
The current government has left personal allowances as they were for 2022/23, which many have seen as a stealth tax given the increase in the cost of living. However, they have also decreased the threshold for additional tax from £150,000 to £125,000 and that is a blatant tax increase for those earning above £125,000. There are still some allowances that landlords can apply and we strongly recommend landlords get qualified tax advice.
4. Dividend allowance – this has also been reduced from £1,000 to £500. This is not a large increase but with many landlords switching or having switched from owning rental property in personal names to limited companies, this will mean directors taking dividends will pay a little more tax from April 2023. It is unlikely this will deter many landlords from using limited companies going forwards though as the benefits compared to personal ownership are still considerable for many landlords.
We always recommend obtaining qualified taxation advice to any landlords considering using limited companies. Hunt has also targeted Capital Gains Tax (CGT) as part of his plans to cut the deficit. These changes will mean that the tax-free allowance for CGT will decrease from £12,300 to £6,000 and will drop even lower to £3,000 in 2024. Of course, this hasn’t been the most popular decision amongst landlords and investors. It means landlords will have to pay more tax on the profit they make from a property or buy-to-let property sale. Indeed, unlike other assets which are taxed at 20% of their profits, the residential property carries a 28% CGT charge for higher or additional rate taxpayers.
Landlords could have faced a costlier outcome, however. It was rumored that CGT rates could double ahead of the Autumn statement. Property investors were relieved to see this did not come to fruition.
5. Tax Rates – One of the most common questions landlords ask is ‘what will the tax rates be for the next financial year?’ In the Autumn Statement, the Chancellor hinted he wanted ‘those with more to contribute more’. But also that he’d like to avoid tax hikes that could limit economic growth. His predecessor, Kwasi Kwarteng, tried to make unfunded cuts to the amount of tax that the highest earners paid. This led to the dramatic reaction we saw from the financial markets. But as we discovered, despite the headline tax rates staying where they were, the threshold at which people pay them has been frozen for a further two years (until 2028). This will translate to a real terms tax increase for many.
The threshold for National Insurance and Inheritance Tax has also been frozen. The inheritance tax threshold, for example, will stay at £325,000 with a rate of 40% until 2028. Additionally, the threshold for the highest tax rate has been dropped from £150,000 to £125,000 – with Hunt aiming to generate an extra £1.3 billion in tax revenue. For the more than 600,000 people who earn over £125,000, this will increase their tax bill by at least £1,200. Landlords with multiple properties and large portfolios will likely be affected by this. To clearly outline the different thresholds for the amount of tax that landlords will pay on their rental property income in 2023/24, we have created the table below. Please note, however, that while we are focusing primarily on property income, income from wages, self-employed profits, pensions, benefits-in-kind, reimbursed expenses, and redundancy payments can all be counted as taxable income.
What’s more, these tax rates primarily concern those who are investing as individuals. But landlords can also invest in buy-to-let property via limited companies, partnerships, and other corporate structures. Should you invest through a company, the profit you’ll make will be liable to corporation tax instead, which is currently 19%.
How you’ll be taxed will be dependent on your unique circumstances and setup. As such, you will need to work with a tax advisor to fully understand what you’ll owe.
|Income received from rental properties
|Tax rate landlords must pay
|£0 – £12,570
|£12,571 – £50,270
|£50,271 – £125,000
|£125,001 and above
4. Mortgage interest tax relief and tax credits – Before April 2020, landlords were able to deduct their mortgage expenses from their rental income. With this tax relief they could lower their tax bills by as much as 40%. Since the first full month of lockdown, the system has changed. Now, buy-to-let landlords can claim a tax-credit that’s based on 20% of their mortgage interest payments. As such, higher or additional rate taxpaying landlords are no longer able to claim buy-to-let tax relief, as the credit only refunds tax at the 20% basic rate. It could also push some landlords into a higher tax bracket. This is owed to the fact that they’ll need to declare the income that was used to pay their mortgage as well.
Indeed, these mortgage restrictions apply only to individuals, so landlords who purchase their buy-to-let properties through a limited company are exempt, so pay tax on profit rather than income.
5. Dividend Allowance – From the start of the new tax year, the Dividend Allowance will be reduced to £1,000. This amount will then be halved in April 2024 to £500 per year. This could affect those who receive dividends from a property investment company.
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