Property Tax Insider Monthly Newsletter

Holding a property rental business personally can have several drawbacks, not least of which being the comparably high tax rate.  Unlimited liability is quite a scary prospect in these litigious days, and with the inability to offset mortgage interest at higher and additional rates coupled with income tax payable at up to 45%, is it any wonder that many landlords continue to consider the possibility of a corporate wrapper for their property businesses?

Meg Saksida considers whether the incorporation of a property rental business is worth it from a tax perspective.  

Although the cash basis is the default basis of accounts preparation for most landlords with rental income of £150,000 a year or less, some landlords continue to prepare their accounts using the accruals basis. This may be because they do not qualify for the cash basis, as would be the case if their annual rental income is more than £150,000, or because they simply choose to prepare accounts using the accruals basis. 

Sarah Bradford explains how landlords using the accruals basis can obtain relief for capital expenditure. 

When considering the availability of principal private residence (PPR) relief for capital gains tax purposes, there is an important distinction between occupying a dwelling and residing in it. 

Mark McLaughlin warns that occupation by a house owner will not necessarily be enough for a private residence relief claim on its disposal. 

There is a mechanism for private individuals to reclaim VAT when building their own homes (or directly paying a builder or similar to build the house for them). Where a property developer builds a new dwelling for sale or ‘long lease’, the supply is zero-rated, and the developer may register for VAT, reclaim the bulk of the VAT cost on construction (there are some restrictions), but then charge £0 VAT on the sale. The new homeowner incurs no actual VAT cost, but the developer is still able to reclaim most of the VAT they have incurred.

Lee Sharpe points out that the First-tier Tribunal has said HMRC was wrong to insist that DIY Housebuilder VAT claims can be made only once per building and after the work has been completed. 

Going back beyond the last few years, most landlords found little tax-based incentive to incorporate their property business; unless profits were very substantial, there was no or negligible tax saving to be made. That is not to say that there were not other good reasons for landlords to seriously consider incorporation. It’s just that, unlike traders, your average annual property income tax bill would likely not be one of them.

Lee Sharpe warns that putting a property portfolio into a company can be a bad idea for some, with the Spring Statement 2022 heralding leaner years ahead.

Andrew Carnegie once said, “The wise young [person] or wage earner of today invests his money in real estate”. He was also quoted as saying, “Ninety per cent of all millionaires become so through owning real estate”. Carnegie died in 1919, but what he said must be true, as property ownership remains one of the best investments a savvy investor can make. 

Meg Saksida outlines some pitfalls to avoid where investment property is jointly owned.

Sarah Bradford explains how landlords can secure tax relief for capital expenditure when they prepare their accounts using the cash basis.

The cash basis is the default basis of accounts preparation for landlords with rental receipts (calculated on the cash basis) of £150,000 a year or less. 

Individuals who are landlords are not normally liable to National Insurance contributions (NICs) on rental profits, unlike self-employed individuals carrying on a trade. 

Mark McLaughlin looks at the potential liability to National Insurance contributions for individual landlords on rental income profits.  

A question often asked by investment property landlords is whether they can transfer the right to rental income to family members, whilst retaining ownership of the property (e.g., a parent wants their adult offspring to receive the rental income from their buy-to-let property, to help them save for their first home).

Mark McLaughlin outlines two income tax anti-avoidance provisions aimed at discouraging the transfer of income such as rents.

Landlords who hold their business in a sole trader (ST) structure are very often tempted by incorporation. There can be so many advantages on top of the lower tax rate, and all are a great lure, but incorporation can also have some downsides. 

Meg Saksida considers the pros and cons of incorporating a rental property business.

For those readers subject to stamp duty land tax (SDLT) in England and Northern Ireland, most will probably be familiar with the regime that introduced the higher rates for additional dwellings (HRAD), typically referred to as ‘the 3% surcharge’. Finance Act 2016 updated FA 2003 with a new Schedule 4ZA. 

Lee Sharpe looks at HMRC’s approach to the 3% ‘extra home’ SDLT charge in England and Northern Ireland and how it has changed over the course of the pandemic.

Expenditure may be capital or revenue in nature. The distinction is important as it will determine how the expense is treated for tax purposes and the relief (if any) which is available. 

Sarah Bradford considers how to differentiate between capital and revenue expenditure, and why it matters.