Whether you’re already a landlord or about to enter the buy-to-let market, there are a lot of things to consider as the owner of a rental property, including tax.

It’s really important to be aware of the taxes you are required to pay when you purchase a buy-to-let, when you rent the property out and when you then sell it so you can budget accordingly.

In this article, we break down the different taxes you need to be aware of.

ESPC Lettings is an expert letting agent based in Edinburgh who can advise you on all aspects of being a landlord or the buy-to-let market. Get in touch today on landlord@espc.com, 0131 253 2847 or by using the form below.

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Tax requirements

Quick links

Tax for Scottish landlords when you buy a rental property

Tax for Scottish landlords when you let out a rental property 

Tax for Scottish landlords when you sell a rental property

Tax for Scottish landlords when you buy a rental property

When you purchase a property to rent out in Scotland, you may be subject to Land and Building Transaction Tax (LBTT) and the Additional Dwelling Supplement (ADS)

What is Land and Building Transaction Tax (LBTT)?

LBTT replaced Stamp Duty in 2015. This tax is applicable to property transactions in Scotland over a certain value.

The zero-tax threshold for LBTT used to be £145,000, meaning properties purchased under that amount would not be liable for LBTT. However, the Scottish Government raised the zero tax threshold to £250,000 in July 2020 in order to stimulate the property market after lockdown restrictions – this change is temporary and will end at the end of March 2021. Find out more about this LBTT holiday.

The LBTT table below shows what the rates are now and what they were before (and will return to after 31st March 2021).

LBTT band Transactions before 15th July 2020 Transactions between 15th July 2020 and 31st March 2021
Up to £145,000 0% 0%
£145,000 - £250,000 2% 0%
£250,001 -£325,000 5% 5%
£325,001 - £750,000 10% 10%
Over £750,000 12% 12%

An example of how this works would be if the house price was £275,000, the first £250,000 would be charged at 0% and the remaining £25,000 would be charged at 5% resulting in LBTT payable of £1,125.

Use our LBTT calculator to work out how much tax you will need to pay when purchasing a property.

What is the Additional Dwelling Supplement (ADS)?

ADS is a supplementary LBTT charge on second properties, such as buy-to-lets. The Scottish Government introduced this in April 2016.

The ADS rate is currently 4% and applies to second property of £40,000 or more. It’s therefore important for landlords to factor this cost into their budget for a rental property.

For example, for a property purchased at £275,000, you would be liable to pay £1,125 in LBTT along with £11,000 in ADS, making it £12,125 in total.

Tax for Scottish landlords when you let out a rental property

An important aspect to consider when entering the buy-to-let market is that you will need to pay income tax on your property.

Do I need to pay tax on rental income in Scotland?

Yes. The first £1,000 of your rental income each year is tax-free – this is your “property allowance”.

If your net rental income in the tax year is more than £2,500 (after allowable expenditure) and you don’t already complete a tax return, then you need to register for self-assessment.

If your net rental income in the tax year is less than £2,500 but more than £1,000, you should contact HMRC directly as you will still need to pay tax on your income, however you are not required to complete a full self-assessment tax return.

How much tax do I need to pay on rental income in Scotland?

To calculate your taxable property income in the tax year you take all your rental income for the year and deduct all your allowable expenses for the year. The net amount is the profit for the year which is taxable.

The amount of tax you pay on your rental income will depend on how much tax you pay on your other earnings – if you are a basic rate tax payer, you will pay 20% and if you’re a higher rate tax payer, you will pay 41%.

What expenses or tax deductions can landlords in Scotland claim?

Allowable expenses include buildings and contents insurance costs, letting agents’ fees, utility and council tax bills paid for by you, maintenance and repairs (but not improvements), accountancy fees and advertising costs.

Allowable expenses do not include “capital expenditure”, like buying a property or renovating it beyond repairs for wear and tear.

You may also be able to claim tax relief on money spent on replacing a “domestic item”, such as beds, sofas, curtains, carpets and fridges.

Finance costs are now restricted to the basic rate of income tax (currently 20%). This includes things like mortgage interest, interest on loans and fees for taking out or repaying mortgages or loans. Instead of being able to deduct these costs from your profits, you will receive a basic rate reduction in your income tax liability.

For example, if you spend £20,000 a year in mortgage interest, you will not deduct this amount from income in order to calculate net profit, but the overall income tax you have to pay will be reduced by £4,000 (20% of £20,000).

Working out income tax with regards to rental properties can seem complicated, so you may find it useful to speak to an experienced letting agent who can help advise you and point you in the right direction.

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Tax for Scottish landlords when you sell a rental property

If you decide to sell your buy-to-let property, there is another tax to be aware of.

Do I need to pay capital gains tax when I sell a rental property in Scotland?

Yes, if you own multiple properties, capital gains tax will apply when you sell any of those properties which are not your main residence. This means buy-to-let properties are subject to capital gains tax when sold.

You must report any capital gain in your self-assessment tax return for the tax year in which you sold the property, and the actual tax is payable on 31st January following the end of the tax year.

How much capital gains tax do I need to pay?

When you sell your property, you must pay Capital Gains Tax (CGT) on any gain that has arisen since you bought it. The gain is calculated as amount you receive for the property less the amount you paid for it and any amounts you have spent enhancing the value of the property such as an extension or new bathroom.

Any Stamp Duty or LBTT that you paid when you bought the property can be deducted as a cost of purchase as well as any legal fees that you incurred to buy and sell the property.

In the UK, you pay higher rates of capital gains tax on property than other assets. Basic rate taxpayers pay 18% on gains they make when selling property, while higher rate taxpayers pay 28%.

Individuals have an annual personal allowance of £12,300 and if gains are within the allowance, no Capital Gains Tax is payable.

Where the property has been your home during the time you owned it, you will be eligible to claim principal private residence relief which means that part, if not all, of the gain is exempt from CGT. There are complex rules surrounding this relief so we would suggest that you consult your tax advisor when you sell your property to see if you are eligible.

Expert advice for Edinburgh landlords from ESPC lettings

If you’re a landlord or buy-to-let investor in Edinburgh looking for expert advice on tax issues or anything else, contact ESPC Lettings on landlord@espc.com, 0131 253 2847 or by using the form below.

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