This is a sample excerpt from our newly updated Property Tax Book - 101 Property Tax Tips Save 40% Today
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Private Landlord
The vast majority of UK properties are privately owned by individuals, many having been purchased as an investment rather than as their main residence.
The private investor landlord is taxed on the amount of letting income received less allowable expenses incurred on a fiscal year basis, as well as on any capital gain that may be made on the sale. Inheritance tax may be payable on the value of the property held at the date of death. Stamp duty land tax (land and buildings transaction tax in Scotland, land transaction tax in Wales) may be payable on the purchase of the property and VAT may be due if the business is trading.
If the landlord has no other income, the annual personal allowance is deducted from any profit made on that letting income. If there is other income, the personal allowance either may not be available or be restricted such that any rental profit made will be taxed at the landlord’s marginal tax rate. When an individual’s total taxable income including letting income exceeds £100,000, the annual personal allowance is gradually reduced by £1 for every £2 of additional income. Therefore, once income reaches £125,140, the tax-free personal allowance is lost completely, and tax will be payable at the additional rate of 45%.
Individual landlords can claim a ‘property allowance’, the claiming of which removes the liability to tax should gross rental income be less than £1,000 (see Tip 35). Where gross income exceeds £1,000, the allowance can be deducted from income in place of the actual expenses incurred, should this produce a lower taxable profit. Such a situation will be in point where expenses are less than £1,000. However, where expenses exceed £1,000, the actual expenses incurred should be deducted as this will maximise tax relief. Similarly, actual expenses incurred should be deducted where this produces a loss, so as to preserve that loss.
Depending upon the level of letting profit, being a sole investor could be more expensive than joint investor ownership. A sole investor will be taxed at their marginal tax rate whereas each owner’s profit share is split under joint ownership, being taxed at their respective marginal rate. For example, should a property be jointly owned 50:50 with one taxpayer a basic rate taxpayer and the other a higher or additional rate taxpayer, the total tax bill will be reduced by 50% of the difference between the tax due at the higher and lower rates as compared with the tax that would be payable should the income be received solely by the higher or additional rate taxpayer. Further tax reduction is possible should one investor be a non-taxpayer, as the full amount of that individual’s personal allowance will be available for offset (assuming no other taxable income).
The default split of joint ownership between husband and wife is 50:50. However, if it is more income tax efficient for the split to be different, then the profit may be divided according to the underlying ownership of the property, once HMRC has been notified (see Tips 10 and 11).
The following example shows the tax position should a property be owned jointly but one spouse is taxed at a higher tax rate than the other.
Example
Joanne and Robert are married and jointly own a portfolio of rental properties 50:50.
For the year 2024/5, each has other income such that Joanne is a 20% basic rate taxpayer but Robert is a 45% additional rate taxpayer.
Total net rental profit is £825 per month, i.e., £9,900 per year = £4,950 each.
Joanne: Tax liability of £990 (£4,950 @ 20%).
Robert: Tax liability of £2,227.50 (£4,950 @ 45%).
If Robert owned the properties as a sole investor, then the tax liability would be £4,455; by owning the properties jointly with Joanne, there is a tax saving of £1,237.50.
This saving could be increased should the properties be placed solely in Joanne’s name (assuming that the taxable profit does not take her into the higher rate tax band). However, should Robert not want to relinquish full ownership, he could give Joanne say, 95%, submit a form 17 to HMRC and be taxed on the underlying percentage of 5% at higher rates (see Tips 9 and 10).
Property Partnerships
For a ‘trading’ partnership to exist, there needs to be a degree of organisation with a view to making a profit (similar to that required for an ordinary commercial business). However, unlike a limited company or a limited liability partnership, a general partnership has no legal identity distinct from its partners. As such, each partner becomes jointly and severally liable for the partnership’s debts; therefore, a partnership agreement is recommended.
Joint owners of property purchased with the intention to sell after restoration are likely to be in a ‘trading partnership’, with each being taxed as a self-employed ‘property dealer’ which could mean becoming liable to National Insurance contributions.
Partnerships have a unique tax structure as they do not pay income tax or capital gains tax (CGT). Instead, the income or loss, or gain incurred from the sale of a partnership asset, is passed through to the individual partners, who report it on their personal tax returns. Profits and losses must be shared in accordance with the ratios, etc., agreed upon at the time of partnership creation, which does not allow partners to work out their annual profits first, and then calculate the allocation so as to minimise overall tax exposure.
A CGT charge may arise when individual partners’ interests in the partnership property reduce as they are deemed to have disposed of some or all of their interest in the property. Such a situation may arise when a partner retires or sells part of their partnership share. However, HMRC Statement of Practice D12 states that interests can move between partners (who are otherwise unconnected) without triggering CGT, so long as the property has not been revalued beforehand and money has not changed hands. Business asset disposal relief may be available should the partnership use the property (e.g., a veterinary practice – see Tip 60).
Corporate Or LLP Landlord
Company limited by shares
There are different types of companies but the one commonly used for property tax planning is the private company limited by shares. Shareholders are the owners of the company, which is administered by directors (who may also be shareholders). There are advantages and disadvantages of a company owning property, e.g., although companies do not have a personal allowance, if the profits from a property business owned by individual(s) are charged at the higher personal tax rates (40% or 45%), it could potentially be more beneficial for the properties to be owned by a company as the tax rates are lower. The main rate of corporation tax for companies with profits of £250,000 or above is 25% and the small profits rate for those companies with less than £50,000 profit is 19%, with a tapering calculation for profits between the two limits.
Where there is a personal capital gain arising on the sale of a UK property, the tax thereon must be paid within 60 days of completion of the sale (see Tip 57). In contrast, a capital gain made by a company is included in the calculation of profit or loss with any tax being payable nine months and one day after the accounting period end. A further important distinction is that tax relief for interest paid on residential property loans by individual investors is restricted such that the amount paid only attracts tax relief at the basic rate of 20% as an income tax reduction (see Tip 21). These rules do not apply to interest on commercial property loans where deduction of mortgage interest allowed in full.
Other relevant points:
- A limited company is a separate legal entity from the shareholders.
- Profits and losses belong to the company.
- The company can continue regardless of an individual shareholder or director's death, resignation or bankruptcy (although there must be at least one director in place).
- The liability of shareholders is limited to the amount unpaid (if any) on the shares held.
- If the company fails, the shareholders are not generally required to make good the deficit (unless personal guarantees have been given).
- A company may find it easier to raise finance.
Disadvantages of incorporation include additional compliance costs and that the overall tax bill may increase should the shareholder make withdrawals from the company as dividends (depending on the availability of the personal and dividend allowances)’.
Limited liability partnership
In some cases, operating via a limited liability partnership (LLP) may be preferable. Profits of an LLP are divided amongst the partners (owners) and then taxed at the marginal rate of each partner. The benefit is that the partnership profit split can be changed year-on-year as required – unlike for companies or personal ownership.
The individual partners are treated as self-employed, paying income tax on their share of the profits, and Class 4 National Insurance contributions, where relevant. An LLP can acquire property or the partners can transfer property they already own into the LLP. On transfer, the property is held on trust but the underlying legal ownership remains unchanged, therefore no stamp duty land tax or capital gains tax is payable on the transfer. Where a member transfers property, the value forms the opening balance on that partner's equity account.
