Landlord tax: A guide on property investment taxes
Investing in property is ultimately about providing great homes for people to live in or spaces for businesses to trade. For the investor, this in itself can be a great business and provide a good income or long-term pension. But it comes with various tax implications that landlords must understand and manage. Whether you're considering becoming a professional property landlord or already managing a property portfolio, you will have to navigate the complex world of property taxation. A property tax expert should be part of any investors core ‘power team’.
Tax implications for individual landlords
Individual landlords are property owners who rent out their properties as private individuals, rather than through a limited company. Let's explore some of the tax implications for individual landlords:
Income Tax
Rental income generated from properties is subject to Income Tax. The amount of tax you pay is calculated based on your total income (salary, dividends, interest, rents and any other personal income combined), minus allowable expenses. Allowable expenses include, property maintenance costs, letting agent fees, and more. The Income Tax rates you'll pay depend on your total taxable income, including rental income.
Since 6th April 2017, the UK government gradually introduced a measure that restricts the amount of income tax relief landlords can get on residential finance costs, such as mortgage interest, to the basic rate of tax. As of 6th April 2020 this was fully in place. This means that landlords can no longer deduct all of their finance costs from their property income to arrive at their property profits. Instead, they receive a basic-rate reduction (20%) from their income tax bill for their ‘finance costs’. The finance costs include mortgage interest, overdrafts, interest on loans to buy furnishings, fees and any other incidental costs incurred when taking out or repaying mortgages and loans, discounts, premiums and disguised interest. This has led to more landlords choosing to buy in a limited company.
Capital Gains Tax (CGT)
When you sell a property, you may be liable for Capital Gains Tax (CGT) on any profit made. The profit is calculated by subtracting the property’s purchase price from the selling price, including any allowable costs like legal fees and stamp duty. The rate of CGT varies depending on your overall income, but it’s generally lower than Income Tax rates.
Inheritance Tax (IHT)
Inheritance Tax (IHT) is a consideration for landlords who own property and wish to pass it on. The value of your property portfolio is included in your estate for IHT purposes. There is a tax-free threshold which has been £325,000 per single person since 6th April 2009 and will stay frozen at this level up to and including 2028/2029. If your estate's value exceeds it, IHT may be due at a rate of 40% on the portion above the threshold.
Benefits of setting up a Limited Company
Many landlords are now choosing to set up limited companies to manage their property portfolios due to certain tax advantages:
Corporation Tax
One significant benefit of operating as a limited company is that rental profits are subject to Corporation Tax, which currently has a lower rate than the highest Income Tax rate. In the 2023-2024 tax year, the Corporation Tax rate for companies with profits under £50,000 is 19%, making it more tax-efficient for some landlords.
Mortgage Interest Tax Relief
One of the most substantial advantages of operating through a limited company is the ability to fully deduct mortgage interest as a business expense. For individual landlords, the ability to deduct mortgage interest is now restricted.
Inheritance Tax Planning
Limited companies can offer more flexibility in estate planning, potentially reducing IHT liability. Shares in the company can be passed on, potentially not crystallising the 40% IHT rate that applies to property assets held by individuals.
Capital Gains Tax (CGT)
Capital Gains Tax for limited companies is typically lower than the individual CGT rate. Additionally, limited companies have more flexibility in terms of when and how they sell properties, potentially allowing for tax-efficient disposals.
Considerations when setting up a Limited Company
While there are clear tax advantages to operating as a limited company, there are also important considerations:
Setup Costs
Setting up and running a limited company involves additional costs, including registration fees, legal fees, and ongoing administrative expenses.
Administration
Limited companies require more extensive record-keeping and financial reporting, which can be more complex than managing properties as an individual. An accountant is usually essential.
Mortgage Availability
Mortgage options for limited companies may be different and more limiting. Interest rates and fees could be higher compared to individual buy-to-let mortgages.
Exit Strategies
Exiting a limited company structure can be more complicated than selling properties as an individual. It's essential to consider your long-term goals and potential exit strategies.
Conclusion
As a professional property landlord, understanding the tax implications of your investment is crucial for optimising your financial outcomes. Whether you choose to operate as an individual or set up a limited company, carefully assess your specific circumstances and consult with a qualified tax professional to ensure you make informed decisions that align with your financial goals. Tax laws and regulations can change, so staying up-to-date with the latest tax developments is essential for property investors.
Remember that this guide provides general information and should not replace professional tax advice tailored to your individual situation.