Buy-to-Let Guide
Mortgages
How do buy-to-let mortgages work?
Buy-to-let (BTL) mortgages are for landlords who buy property to rent out. The general rules around buy-to-let mortgages are similar to those of regular mortgages. If you are letting property on a commercial basis, lenders will insist on buy-to-let products rather than standard residential deals.
Common differences between buy-to-let mortgages and ordinary mortgages include:
- arrangement fees tend to be higher;
- interest rates on buy-to-let mortgages are usually higher than standard residential mortgages;
- the minimum deposit for a buy-to-let mortgage can vary between 20%-40%; and
- most BTL mortgages are interest-only.
How much you can you borrow for buy-to-let mortgages?
- The maximum you can borrow is usually linked to the amount of rental income you expect to receive.
- Lenders typically expect the rental income to be 25–30% higher than your monthly mortgage payment.
Most banks and financial institutions now offer BTL mortgages.
Mortgage offers can vary widely and it is often sensible to talk to a mortgage broker before you take out a buy-to-let mortgage, as they will help you choose the most suitable deal for you.
Primus has worked for many years with a number of specialist independent brokers so that our clients are supported throughout the process and have access to the best deals on the market.
Allowable expenses
Allowable Expenses Guide
You will pay tax on the “net rental income” falling in each tax year to 5th April. Net income is calculated using the total rental income less allowable expenses.
Listed below are common types of expenses that you can deduct:
general maintenance and repairs to the property, (but not improvements, such as replacing a laminate kitchen worktop with a granite worktop)
water rates, council tax, gas and electricity
insurance, such as landlords’ policies for buildings, contents and public liability
costs of services, including the wages of gardeners and cleaners
letting agent fees and management fees
legal fees for lets of a year or less, or for renewing a lease
accountant’s fees
rents (if you’re sub-letting), ground rents and service charges
direct costs such as phone calls, stationery and advertising for new tenants
vehicle running costs (only the proportion used for your rental business – it is often easier to claim the simplified pence per mile method)
Expenses you can’t claim a deduction for include:
the full amount of your mortgage payment – only the interest element of your mortgage payment can be offset against your income (see phased-in changes regarding mortgage interest below)
personal expenses – you can’t claim for any expense that was not incurred solely for your property rental business
extending the property and some building work. These costs are classed as capital and can only be included when you dispose of the property within the capital gains tax calculations
Mortgage & loan interest or alternative finance charges
Up to 5th April 2017, all interest or finance charges incurred on the purchase of the property are allowed in full against the rental income for that year. From 6th April 2017 onward, interest and finance charges will be restricted to basic rate (20%) tax relief. These changes will be phased in as follows:| Tax year ending 5th April 2018 | 25% will be restricted to basic rate tax relief |
| Tax year ending 5th April 2019 | 50% will be restricted to basic rate tax relief |
| Tax year ending 5th April 2020 | 75% will be restricted to basic rate tax relief |
| Tax year ending 5th April 2021 | 100% will be restricted to basic rate tax relief |
Self Assessment – Register as a landlord
Self Assessment – Register as a landlord
If you are not already registered for Self Assessment, you will need to register with HMRC as soon as you can after you start to let the property commercially.
You need to register by 5th October after the end of the relevant tax year. You could be fined if you don’t.
If you haven’t sent a return before
Register online and you’ll:
- get a letter with your 10-digit Unique Taxpayer Reference (UTR)
- be enrolled for the Self Assessment online service at the same time
You’ll also get a letter within 10 working days (21 days if you’re abroad) with an activation code.
Self Assessment – Filing and payment regime
Self Assessment – filing and payment framework
HM Revenue and Customs (HMRC) must receive your tax return and any money you owe by the deadline (detailed below).
| Self Assessment | Deadline |
|---|---|
| By midnight of: | |
| Register for Self Assessment if you’re self-employed or a sole trader, not self-employed, or registering a partner or partnership | 5 October (following the end of the tax year) |
| Paper tax returns | 31 October (following the end of the tax year) |
| Online tax returns | 31 January (following the end of the tax year) |
| Pay the tax you owe | 31 January (following the end of the tax year) |
There’s an additional payment deadline of 31st July if you make advance payments towards your bill (known as ‘payments on account’).
You’ll usually pay a penalty if your return is filed late or the payment is made late. You can appeal against a penalty if you have a reasonable excuse.
When the deadline is different
Submit your online return by 30th December if you want HMRC to automatically collect tax you owe from your wages and pension. You must be eligible.
HMRC must receive a paper tax return by 31 January if you’re a trustee of a registered pension scheme or a non-resident company. You can’t send a return online.
Self Assessment – Penalty and late payment regime
Self Assessment – Penalties and late payment regime
There are tax penalties both for the late filing of Self Assessment tax returns and for late payment of tax due under Self Assessment.
The table below sets out the penalty regime under Self Assessment from the 2010-11 tax year onwards.
Self Assessment – Penalties and late payment regime
There are tax penalties both for the late filing of Self Assessment tax returns and for late payment of tax due under Self Assessment.
The table below sets out the penalty regime under Self Assessment from the 2010-11 tax year onwards.
| Late filing | Late payment | Penalty |
|---|---|---|
| Miss filing deadline | £100 | |
| 30 days late | 5% of tax due | |
| 3 months late | Daily penalty of £10 per day for up to 90 days (max £900) | |
| 6 months late | 5% of tax due, or £300 if greater | |
| 6 months late | 5% of tax outstanding at that date | |
| 12 months late | 5% or £300 if greater, unless the taxpayer is held to be deliberately withholding information that would enable HMRC to assess the tax due. | |
| 12 months late | 5% of tax outstanding at that date | |
| 12 months & taxpayer deliberately withholds information | Based on behaviour:
|
Capital Gains Tax Considerations
Capital Gains Tax – When selling your residential property
When you dispose of your home or “main residence”, there is no capital gain arising on the disposal of the property as this is covered by PPR (Principle Private Residence Relief).
The same exemption does not exist for buy to let properties.
In simple terms, when a buy-to-let property is sold then capital gains (CGT) tax will be due on the difference between the sale proceeds and the costs of the original purchase of the property.
If this is a negative figure, then no CGT is due and the loss can be used against other gains arising in the same year. Alternatively, if unused, it can be carried forward and used against future gains.
If you used to live in the property before you used it as a buy-to-let, the following exemptions will apply:
- The last 18 months of ownership will be exempt from CGT
- Any actual periods of occupation as your main residence will be exempt
- If you were working abroad for a period of time and did not occupy another property qualifying for relief
- Lettings relief to a maximum of £40,000
There may also be tax planning opportunities to reduce CGT liabilities by transferring property between spouses or civil partners. Please contact our experts for further guidance.
Stamp Duty
Stamp Duty
Stamp duty is an important consideration for any Private Landlord.
Stamp duty is paid by the purchaser, with the rate dependent upon the price paid (or ‘chargeable consideration’) for the property.
From 6th April 2016, where an individual already owns a residential property there will be a 3% supplement added to the normal stamp duty rates.
Most landlords will already have a residential property (e.g. their main home) so the supplement rates will be more common.
The current rates for residential property are as follows:
| Price paid (or chargeable consideration) | Main rate | Supplement rate |
|---|---|---|
| Under £125,000 | Nil | 3% |
| The next £125,000 | 2% | 5% |
| The next £675,000 | 5% | 8% |
| The next £575,000 | 10% | 13% |
| In excess of £1,500,000 | 12% | 15% |
Joint Ownership tax planning
Joint Ownership Tax Planning
Often, ownership of rental property is shared with other people. If this is the case, the rental income will be taxed depending upon your share of the property.
Property jointly owned with spouse or civil partner
Property jointly owned by married couples and civil partners who live together will usually be taxed in equal shares, unless you decide to split ownership differently.
If you own the property in different shares, you can use a different profit split.
If you own the property in unequal shares, and are entitled to the income in the same unequal shares, the income can be taxed on that basis. If this is the case then you both need to notify HMRC.
Property jointly owned but not with a spouse or civil partner
If you own a property jointly with another person who isn’t your spouse or civil partner, your share of the rental profits or losses will usually be based on the share of the property you own.
Remove the hassle of Self Assessment by using our expert tax team.