If you own a buy to let personally – that is, it’s owned in your name and not by a company – and your total rental income (before expenses) in the current tax year is less than or equal to £1,000, you do not have to declare it to the taxman and you do not have to pay any tax on it. You don’t need to do anything for this to apply; it will apply automatically.
If your income from your property rental is higher than this allowance, you will need to declare it on your self-assessment tax return.
Tax will be payable on income that exceeds your personal allowance. Your personal allowance is the amount of income you can earn each tax year without having to pay tax, and for the 2021/22 tax year is £12,570.
Basic rate taxpayers (earning over the personal allowance but under £50,270) pay 20% income tax, higher-rate taxpayers (earning between £50,270 and £150,000) pay 40%, and additional rate taxpayers (earning over £150,000) pay tax at 45%.
However, you should be able to deduct certain expenses from the payable amount if you can prove they were solely for the purpose of renting and maintaining your buy to let property. These expenses include insurance policies, the costs of general maintenance and repairs (but not improvements), services such as gardeners or cleaners, and certain legal costs. You can find out more about how exactly these allowances work here on GOV.uk.
Landlords were previously able to deduct mortgage interest in full from their rental income before being liable to tax, which meant that higher-rate taxpayers benefited from considerable tax relief. However, the amount of mortgage interest tax relief that can be claimed has been gradually reduced over time, and now stands at a flat tax credit of 20% on mortgage interest, regardless of whether you’re a basic, higher or additional rate taxpayer.
You will also have to pay capital gains tax, or CGT, if you sell the property and make a profit that exceeds your current annual capital gains tax allowance. In the 2021/22 tax year, the CGT allowance stands at £12,300. If you’re a basic-rate taxpayer, you’ll pay capital gains tax at a rate of 18% on any profits above your allowance, rising to 28% if you’re a higher-rate taxpayer.
If you have to pay CGT, you’ll have 30 days from the sale completion date to notify HMRC and make a payment.