Arram Berlyn Gardner is a multi award winning firm of Chartered Accountants, Auditors, Tax and Business advisers based in the City of London with extensive knowledge of the property sector, specialising in property tax planning for property investors, landlords and large property owning syndicates based both in the UK and overseas. In this blog post our team take a look at some of the property tax planning tips landlords should consider.
As you’ll know, a key part of running successful rental properties is understanding your tax implications. Rental income is taxable, and capital gains tax will probably come into play when you dispose of a rental property. Then there is stamp duty, of course.
As we covered in our recent property tax seminar, there are plenty of good practices you can follow to optimise your tax position. Here are five of our top property tax tips for you to consider.
Tip one – Assess whether a limited company structure is beneficial
The basic appeal of a limited company is that the rental income becomes subject to corporation tax rather than income tax.
Corporation tax is currently lower than basic rate income tax, although the Treasury has tapered plans in place for it to rise. Income you draw from the company is still taxable, but you have a bit of control over how it is taken (salary or dividend).
Limited companies also offer you a layer of legal protection against personal liability, and mortgage interest is still tax deductible. This deduction has been phased out for individuals, although they can claim a 20% tax credit.
With all that said, there are costs associated with setting up a limited company, which means it’s not worthwhile for some smaller landlords. It’s probably best to seek advice to see if it’s right for you.
Tip two – Know which expenses are deductible
As an individual, you may not be able to deduct mortgage interest anymore, but there is plenty you can deduct to lower your tax bill legitimately.
Check with an accountant or tax adviser exactly what is available to you, but there is a long list of expenses which may be relevant. Costs like lettings fees, insurance and general maintenance will make a dent in that tax bill.
Don’t forget to keep records and receipts to support the deductions you claim for.
Tip three – Understand capital gains tax
This one can get a little complicated, but is worth exploring. While primary residences are exempt from capital gains tax (CGT), further properties are not.
If you are considering selling a rental property it is likely CGT will be payable 30 days after the sale on the profit made. This is 18% for basic rate tax payers and 28% for higher rate taxpayers.
There are things you can do to lower this liability, however. It will take a conversation with a tax adviser or accountant to work out what’s right for you, but everyone has an annual CGT tax-free allowance (£12,300 currently).
You also have some scope to offset losses against gains, and potentially claim some relief if the property was once your main residence.
Tip four – Use a spouse’s tax band
Married couples can transfer assets between each other without incurring capital gains tax, which can be useful for optimising the use of your income tax bands (and potentially CGT allowances if you are eventually selling).
Seek advice to ensure you do not pay stamp duty on the transfer, however:
Everyone has a tax free allowance (currently £12,570) on their income, and then pays income tax at their highest marginal rate, which could be 20%, 40%, or 45%.
It’s therefore tax-efficient to have the rental income go to the spouse with the lowest tax band.
Tip five – Extend an existing property when growing your portfolio
We mentioned stamp duty in the last point, and as you’ll know, there is a 3% surcharge for anyone who owns more than one property. One way to build your rental income without buying more property and paying stamp duty is to develop and extend your existing property.
You’ll want to make sure that the extension makes commercial sense from a rental yield perspective, but if so. it may be a tax saving way to a more valuable portfolio without the need for incurring stamp duty.
Book a consultation
If you would like to explore ways of improving the tax position on your property portfolio, please book a chat with our experts. We can help you understand how the above tips may apply to you as well as sharing other ideas to help.