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How I Avoid Tax on Buy to Let Profits

If you’re a higher rate tax payer you’re currently liable to pay 40% tax on any profits you currently make on your rental properties. So assuming your Buy to Let business is making a profit each year then you really have two options to minimize your tax bill:

  1. Remortgage such that your mortgage interest payments are equal to your rent less expenses. (Beware with this option as the rules around tax relief on mortgage interest are changing soon – see below)
  2. Accept you’ll have to pay tax on your profits and seek to maximize tax breaks elsewhere that can potentially offset this liability

Over the last few years as I have deleveraged my portfolio of properties I have employed the second option above. The simple, and quite elegant solution to me is to…

Reinvest all BTL profits into additional personal pension contributions.

Ok, so the title of this post might have been a little misleading, I’ve not found some magic way of avoiding the tax, merely just achieved the mental equilibrium that I’m directing the taxable income to another investment vehicle that provides an offsetting tax benefit.

Higher rate tax payers currently receive 40% tax relief on pension contributions which will perfectly offset the tax due on your BTL profits. In tax paid terms I’m flat. At the same time I’ve got an ever increasing equity stake in the rental properties (thanks to the capital repayments being made each month) and an ever increasing pension pot.

Of course tax relief on pension contributions aren’t all received up front. A higher rate tax payer will receive 20% relief on their contribution. In cash flow terms this means their pension provider will add 20% to the contribution (and claim it back form the government). This means your £1k contribution immediately becomes £1.25k in your pension.

The remaining 20% needs to be claimed back via your self assessment form. This means that all other things being equal, HMRC will write you a cheque for £250 at the end of the tax year. Any cheques I receive from HMRC tend to get sent to the mortgage company to reduce my outstanding capital or invested elsewhere.

Of course I’m sure there will be people that read this and feel aggrieved at a buy to let landlord (who is also a higher rate tax payer) benefitting from further tax breaks. Well in my defense I’m only playing the game the government puts in front of me. However, those that have been baying for Buy To Let blood will have been exceedingly pleased by the chancellors announcement in the last budget to restrict the tax relief on buy to let mortgage interest to the basic rate of 20%.

I’ll cover these changes in a separate post. Thankfully my BTL strategy has been a low risk one so the forthcoming changes to mortgage interest tax relief won’t have a huge impact on me.

{ 11 comments… add one }
  • ermine October 21, 2015, 11:25 am

    hehe, I think you meant how you manage tax planning, since somewhere in the last five years it seems tax avoidance makes you a Bad Guy.

    Tax planning good, Tax avoidance bad it seems. It used to be so simple – tax evaders were the bad guys whereas the tax avoiders were just on the right side of the line, but no more it seems.

    Anyway, what you describe in this post looks like straight up tax planning!

  • M from There's Value October 21, 2015, 3:44 pm

    I will not change I will not change I will not change – tax avoidance is OKAY tax evasion isn’t. People should stop fannying about with the terms and confusing them. It’s so annoying.

  • BeatTheSeasons October 21, 2015, 10:11 pm

    3. Transfer your BTL property to your basic rate taxpaying spouse so tax on profits is only paid at 20% instead of 40%

    4. Hold the property in equal shares and sell the property during her maternity leave when the rest of her income is very low in order to minimise capital gains tax.

    5. Choose a home for yourself that is larger than you need or on a large plot and then rent out an annexe to take advantage of the newly increased £7,500 pa tax free rent-a-room scheme whilst retaining your privacy by not sharing the same entrance.

    6. If your house needs lots of non-capital work doing on it like a new boiler, replacement double glazing and carpets, move out for a year and, while you’re renting it out to tenants, get all the work done and claim it as a tax deduction against the rest of your rental income.

    • Under The Money Tree October 27, 2015, 8:42 am


      All great ideas – thanks for sharing. However 3 and 4 can only really work if you’re buying a new rental…transferring existing assets is treated like a sale form a tax perspective so you need to be extra vigilant of capital gains liabilities if like me you’ve held the property a while and have reasonable equity at stake.

      I like the idea of 5…maybe I should convert the garage and charge the mother in law an extortionate rent 😉

      • BeatTheSeasons October 29, 2015, 10:00 am

        I think you can transfer assets between spouses without a capital gains tax liability. Stamp duty should be limited to 50% of the outstanding mortgage balance. Do your own research!

  • BeatTheSeasons October 21, 2015, 10:17 pm

    7. Don’t submit any tax returns for 20 years to avoid paying any tax at all and then tell HMRC you don’t have any assets or income:

    • Under The Money Tree October 27, 2015, 8:43 am

      That’s a high risk strategy…though seemingly lucrative if you get away with it!

  • James October 25, 2015, 7:57 pm

    This is a great idea! However, doesn’t a £1k pension contribution become £1.25k not £1.2k?
    £1250*0.8 = £1000.

  • Faustus October 28, 2015, 8:38 pm

    The good news is I think that £1k contribution should become £1.25k in your pension with your basic rate tax added (i.e. you will have contributed 80% of the total), and if a higher rate tax payer then HMRC will give you back another £250 via your Self Assessment (i.e. 20% of the total) – meaning that you will have only in effect given £750 post-tax income to get £1.25k in your pension (i.e. 60% of the total).

    The bad news is there are also those baying for the blood of higher rate taxpayers getting pension tax relief, and lots of media speculation that this will shortly disappear or be significantly reduced. So beware that this route might not be open for much longer.

    • Under The Money Tree October 29, 2015, 9:36 am


      You’re both correct here. A £1,000 contribution gets topped up to £1,250 by the pension provider and you can claim back the remainder from HMRC via your tax return. As mentioned I’m taking advantage of this tax relief now while it lasts!

      • Stephen Francis January 13, 2016, 8:38 pm

        Pension contributions are a good idea but only is respect of relevant earnings. B2L income is considered as investment income so are not relevant earnings for pension contributions. Now down to only £40k annual allowance and LTA is down to only £1m from April 2016. Boxed in from all directions.

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