Taking full advantage of tax planning opportunities can make a significant difference to net of tax income for property owners who let out their properties.
Making use of available income tax allowances and tax rates
Consider transferring assets between spouses to make use of both personal allowances and basic rate tax band. Where one spouse is a higher rate taxpayer it may be beneficial to have the ownership of the property in a ratio of say 90:10 so that most of the rental profit is taxed on the spouse with the lower income.
Here there is a tax trap you need to be aware of
Where the joint owners are husband and wife, profits and loss are treated as arising to them in equal shares unless:
- Both entitlement to the income and the property are in unequal shares; and
- Both spouses must inform HMRC that their share of profits and losses is to match the share each holds in the property
A Form 17 needs to be submitted to HM Revenue and Customs to disclose how profits should be shared and supporting evidence is required to show the share of income and capital are identical.
Allowable expenses will reduce your rental profit. You may consider that some expenses are property improvements, but they make be classified as repairs for tax purposes. You may be able to claim some relief for using your home to manage your rental property or properties.
You can claim up to £1,000 each tax year in a tax free allowance to offset against property income. For a married couple who each have a share in the rental income this £1,000 allowable is available to both. If the actual expenses are more than £1,000 you claim the actual expenses rather than the allowance.
Our advice is do not assume that costs you incur on a let property are not allowable. Keep your receipts and provide them to one of our tax advisors
Be tax prepared when you sell
When you decide to sell a let property consider how the property is owned to get the maximum benefit for capital gains tax.
Planning opportunities include:
- Get the maximum benefit of the capital gains tax annual exemption. Consider transferring some ownership to a spouse so that both of you can claim the capital gains tax annual exemption
- A higher rate taxpayer pays capital gains tax at 28% on the sale of residential property compared to 18% for a basic rate taxpayer. Consider the % ownership of the residential property so that the spouse with the lowest rate of tax has a greater share of the capital gain. But also ensure that both spouses make full use of the capital gains tax annual exemption
- If more than one let property is being sold, or if other investments are being sold, consider the timing of disposals so that the sale takes place in different tax years to get a capital gains tax annual exemption for each different tax year
Use a limited company
Using a limited company may involve a fair amount of planning to acquire properties, but it can be a great way to save a significant amount of tax where you have several let properties or you are planning to build up a property portfolio.
This type of planning may not suit everyone, and some people will not want the additional burden of meeting all the compliance requirements of operating through a Limited company.
However, if this is of interest to you, please consult one of our tax experts to set if you can benefit from a limited company.