Buy to Let, or Something Tax Efficient

It is a common situation that when I meet with clients, that they may well be considering their retirement income options. One area that is often discussed is the possibility of property investment.

They have often come to this conclusion by the increase in property prices that we have seen over the last few years, and feel that this looks like a good investment. In addition, there is the appeal of the rental income that could be used to provide a boost to existing pension arrangements.

This may well be the case, but at what expense to get there. If you consider the amount of tax that is payable to make the property purchase in the first place and then the tax that will be payable on the income, it can start to look like a less attractive option.

Stamp Duty – Stamp duty tax is payable on the purchase of the property. The rates you pay is set in tiers, depending on the price of the property. These tiers have increased by 3% since April 2016, for second properties, and therefore adding significantly to the cost of the purchase.

An example would be buying a house at £300,000.00. The Stamp Duty tax payable would be:

On the first £0 – £125,000   3%

On the next £125,001 – £250,000   5%

On the last £50,000   8%

This is a total of £13,999.95 in tax


Income Tax – Rental income is also taxable. You have to declare your rental income as part of your Self Assessment tax return. This is added to your other income and taxed at either 20% for basic rate tax payers, 40% for higher rate tax payers and 45% for additional rate tax payers.

You do have allowable expenses that you can deduct from your taxable rental income. These include:

  • Rents, rates, insurance, ground rents etc
  • Property repairs and maintenance
  • Interest on but to let mortgages and other finances charges
  • Legal, management and other professional fees such as a letting agency
  • Other property expenses including building insurance premiums

There were changes in the summer budget 2015, that mean that Landlords who were paying 40% or 45% tax, and could claim relief at their highest rates of tax, will now only be able to claim 20% regardless of the tax the Landlord pays. This will be fully in place by the 2020/2021 tax year. Not good news.

On top of this, the rental income you receive does not qualify as income for pension purposes.

Capital Gains – If things go well, and when you sell the property you have made a gain, guess what, you could pay tax again then.

You would need to declare any gain on your tax return and, if over your annual CGT allowance, tax will be due at either 18% or 28%. If you have made a loss in a previous year, you may be able to use this to reduce your gain and there are some expenses that you are able to deduct, such as buying, selling or improving the property. It could well be the case that you would need to employ an accountant to assist you with this, as other allowances such as wear and tear, that used to be available, have also been removed.

It doesn’t stop there.

Inheritance Tax (IHT) – You may need to pay inheritance tax on a buy to let property. An individual has a nil rate band of £325,000 (up to 650,000 for married couples). IHT is charged at 40% on everything above these amounts. So, depending on the size of your estate and the amount of nil rate band you have available, this could be another sizeable amount to pay.

As a Financial Planner, when I am making my recommendations for a client, I will always consider, amongst other things, the impact tax and charges can have on the overall return. As shown above tax can have a huge impact, and this is without considering the impact of estate agents, property management companies and solicitor’s fees.

If we consider that all growth made within an ISA is free of both income tax and capital gains tax and paying into a pension actually attracts tax relief at your highest rate of tax, these look far more appealing. Also, your capital remains liquid unlike bricks and mortar. All you need to do is review your investments regularly, you will not be required to cut the grass, change the kitchen, or clean out the guttering.


Kristina Bailey DipFA CeMAP


This information is provided strictly for general consideration only. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case. Based upon our understanding of UK tax law at January 2018. The value of investments can fall as well as rise and you may not get back the full value of your investment