Stamp Duty on Buy to Let Property Explained

If you are interested in buy to let properties, you may be aware that different tax rules can apply when compared to buying a property you plan to live in. Buy to let is a popular strategy for property investors, but it’s important to know what taxes apply to buy-to-let properties including stamp duty. In this blog, we will explain how stamp duty is applied to buy to let properties, how to calculate the stamp duty on buy to let property, how this is affected by your rental income, and more.

Table of Contents

What is Stamp Duty?
What is Buy to Let Stamp Duty?
Stamp Duty Exemptions
How Can I Avoid Stamp Duty on Buy to let Properties?
Other Tax Benefits for Buy to let Investors

What is Stamp Duty?

Stamp duty, also known as Stamp Duty Land Tax or SDLT, is a kind of tax that you pay when buying a house if it costs over a certain amount. If the property is your residential home and you do not have any others, the stamp duty rate is 0% for properties sold for under £250,000. For first-time buyers, stamp duty is 0% for properties up to £425,000. For properties that cost more, the stamp duty rate is 5% up until £925,000, when it rises to 10%. After that, the threshold is £1.5 million, at which point the stamp duty is 12%.

The stamp duty tax only applies to the excess amount, so for example, if you buy a house for £300,000, you would only have to pay stamp duty on the £50,000 that is above the threshold. This is how stamp duty works for residential properties – next, we will look at stamp duty on buy-to-let properties.

Note: there are different rules for stamp duty in Scotland and Wales – check what stamp duty rates apply in your location.

What is Buy to Let Stamp Duty?

You pay more stamp duty on second homes, holiday lets and buy-to-let properties, as the threshold for stamp duty is lower. Buy-to-let properties under £40,000 have 0% stamp duty, 3% for properties between £40,000 and £250,000, 8% for properties between £250,001 and £925,000, 13% for properties from £925,001 – £1.5 million, and 15% for properties over £1.5 million. As with residential property stamp duty, this percentage is applied to the amount that exceeds the threshold.

Stamp Duty Exemptions

There are a few exemptions that apply to stamp duty. Mobile homes, caravans and houseboats are exempt from stamp duty, no matter how much they cost.

First-time buyers who buy a buy to let property don’t need to pay the buy-to-let stamp duty rates but will have to pay the residential stamp duty on properties over £250,000, as the discount only applies to buyers who intend to live in the property. If a property was left to you in a will or you become the owner through a divorce or the dissolution of a civil partnership, you also won’t need to pay stamp duty.

Conversely, the first-time buyer discount does not apply if the property is bought by a company rather than an individual. Also, people whose spouse or civil partner already owns a property will have to pay the extra stamp duty if they buy a property, even if they don’t own one in their name already. Non-UK residents will also have to pay an additional 2% fee on top of their stamp duty rates.

Ready To Build Job Replacing Income With Property?

Can I Avoid Stamp Duty on Buy to let Properties?

Aside from the exemptions listed above, there are a few ways to avoid paying stamp duty or reducing the amount of stamp duty on buy to let you pay. If you are purchasing six or more properties at once, you could qualify for Multiple Dwellings Relief. This works by averaging out the value of all the properties combined, which could reduce the stamp duty. If a new property you buy includes an annexe or ‘granny flat’, i.e. an independent part of the building, you could claim a reduced stamp duty rate using the Annexes and Related Buildings relief.

Another way of reducing or avoiding stamp duty is to transfer a property in your name to someone else like a family member or friend (bear in mind that it doesn’t work if you transfer it to a spouse or civil partner). However, this is problematic, as HMRC may consider this to be a form of tax evasion, if there is no legitimate reason for the transfer other than avoiding stamp duty. Even if it does work and you can avoid paying stamp duty for that property, transferring property to someone else may result in complications and disagreements in the future.

Other Tax Benefits for Buy to Let Investors

Investors can deduct buy to let stamp duty from their Capital Gains Tax, so you can’t be taxed on the same money twice. Landlords can earn money in two ways; from charging rent to their tenants, and from increases in the value of their property. If you rent out a property that you once lived in at the same time, you can claim Private Residence Relief. Some private landlords set up limited companies to take advantage of various tax benefits. This doesn’t help specifically with stamp duty but can help relieve your overall tax bill as corporation tax is charged at a lower rate than Capital Gains Tax.

Taking the time to fully understand your tax obligations as a property investor and landlord can help you avoid overpaying or underpaying taxes, as neither is ideal. Nobody wants to pay more tax than they need to, but likewise, you don’t want to get into any trouble with HMRC as this can result in fines and other sanctions. As with other aspects of property investment, consider seeking professional advice from an accountant or financial adviser who is experienced in property tax and investment. They can find legitimate ways to help you reduce your tax bill and improve the profitability of your investment portfolio.

Do you want to find out more about becoming a property investor? Why not join me, Liam J Ryan, and other property gurus at an Assets For Life FREE property event? Click below to learn more or book your place.