Following our recent blog on upcoming changes to Principle Private Residents Relief effective from April 2020, and the fact that these changes will potentially drive an increase of Air BnB type lettings to benefit from Rent A Room tax relief, we felt a blog with some tax-saving tips would benefit readers actively involved in, or considering making an income from property development. It is important to bear in mind that property investment is in most cases a long-term business venture and tax laws are likely to change over time.
1. Assess tax profiles
Are you buying a property to let on your own or with other individuals? If the latter, it is advisable to assess what each owner will pay on the rental income in tax, and to consider if any allowances could be lost by increasing each person’s total income.
Do you or one of the other investors have any outstanding balances on a student loan? If so, and if you have other income that exceeds the repayment threshold of the loan, then 9% of the rental profits will go towards loan repayments.
2. Commercial or residential?
Whilst a commercial property may be more expensive to buy than a residential property, benefits include longer lease periods, higher rental incomes, and the ability to deduct all costs incurred in full (if buying as a company – see point 5b. below). However, if buying a residential property, whilst there may be a lot of administration involved for regularly changing tenants on short leases, and additional costs for regular property renovation, from a tax perspective, there is no VAT payable on the purchase. A commercial property can attract a number of rates of VAT and we suggest that you contact us direct to discuss this, as details on this are out of the scope of this article.
3. Holiday rentals
There are numerous tax advantages by renting out a property as a furnished holiday let as opposed to a residential letting, as long as the property is let for less than 31 days under each tenancy, and that it is rented for more than 105 days each year. The main benefit is the eligibility to claim capital allowances on fittings and furniture expenditure.
Depending on the size of your holiday rental property, you could save by claiming 100% business rate relief for a small home – business rates are payable on holiday lets rather than council tax which is payable on residential properties.
Furthermore, when it comes to selling the property, entrepreneurs’ relief could be available on capital gains made.
4. Rent a Room tax relief
With the arrival of sites like Airbnb, Rent a Room relief is becoming increasingly popular with homeowners claiming tax exemption on rental income up to £7,500 by offering their homes up as accommodation for holiday makers. If the property has shared ownership, claims of up to £3,750 each can be made. You must be living in the property at the same time as the tenant for at least some of the letting period to qualify for the exemption from income tax on profits of up to £7,500, and if you earn more than £7,500 from rental agreements each year under rent a room, you’ll need to complete a tax return.
5. Consider setting up a company for the property investments
a. Currently, income received from property by an individual is subject to tax rates of up to 45% in England and 46% for investors living in Scotland. Whereas, if a company receives income from property, it is currently taxed at 19% (expected to fall to 17% on 1 April 2020).
b. If you were to take out loans to fund a property investment as an individual, you are only entitled to 20% tax credit which is set against your total income tax liability (this replaces pre-April 2017 deduction of finance charges and interest paid on loans for residential landlords). If you’re a higher rate tax payer it might be especially more tax-efficient for you to set up a company to purchase and own the properties, as a company is eligible to claim a full deduction for all interest and finance charges incurred for any loans taken out to fund the property investment business.
c. From a business buyer’s perspective, wrapping properties in a company at the point of selling the whole property business, will reduce the SDLT (or equivalent), provided the company has submitted the required annual ATED return for any residential properties valued higher than £500,000. An ATED form must be submitted to HMRC for each year that this classification of property is owned by a company, beginning on 1 April to 30 April the following year with penalties applied for late ATED submissions. An ATED charge may be payable for each period the property is not actively used for example if it is not let or under development.
6. Land Transaction Tax
Whichever the method used to purchase a property, you must ensure you report the purchase and pay the SDLT ahead of the 14-day deadline to avoid paying a penalty. This applies for the purchase of a property in England or Northern Ireland and the deadline is 30 days to pay LBTT on properties in Scotland, or LTT in Wales.
If you’d like to find out more about benefitting from property investment, get in touch with our expert Corporate and Personal Tax team in Warrington on 01925 830 830 or call our Manchester office on 0161 905 1801. Our Managing Director will be speaking about Tax Tips for Property Investors at a Buy-To-Let event held by Barclay’s Bank in Altrincham on Thursday 29th August, get in touch to find out more.