Buy to Let - tax implications

Important note: this information was correct at the time of writing, but by nature tax laws change so make sure that this information is still correct by talking to an expert

Income Tax

The Inland Revenue will tax any individual on the profit they make on a Buy to Let property: therefore the difference between the mortgage interest and the other allowable expenses, and the rental income received.

For example, if you generated £12,000 per annum in rent, had £2,000 in allowable expenses and the mortgage interest was £8,000, you would be making a profit of £2,000.  The Inland Revenue would then assess this as earned income and you would be subject to tax at the highest rate that you pay (potentially 40%).

Capital Gains Tax

Owner occupied residential properties are free from capital gains tax when they are sold, but this is a one-off exemption granted by the Inland Revenue.  The sale of any investment property is therefore liable to Capital Gains Tax.

The rate of CGT you have to pay depends on the level of your income liable to income tax. The amount chargeable to CGT is added on to the top of your income and charged at the appropriate rates. Importantly, every individual has a CGT exemption allowance each tax year and therefore tax is only payable on gains above that.

If the asset was acquired before 6 April 1998, indexation allowance may be used in order to reduce the CGT liability. As the name implies, this means that the Revenue accepts that an element of the increase in the value of an asset is because of the natural effects of inflation, rather than an increase in the assets value in real terms. If you are selling an investment property, ensure you understand the Capital Gains Tax implications of selling an investment property

Please note: although the FSA does not regulate most Buy to Let mortgage advice, check that the broker concerned will treat you with the same skill, care and diligence as if they did.

See also:
Buy to let mortgage calculator: how much can I borrow?
Buy to let mortgage calculator: how much rent should I charge?
Check out today's best buy to let mortgages

Useful link: http://www.hmrc.gov.uk/  
HM Revenue and Customs
Information on tax and national insurance.  Obtain information on tax credits, benefits etc