The business of buying and letting property can be compared to playing three-dimensional chess. Decisions made at one stage will affect the tax payable and the deductions allowable for tax at later points in the property business lifecycle.
There are plenty of traps to trip-up the unprepared landlord, so planning ahead will always pay dividends. But remember, property investment is a long-term business and tax laws may change with little notice and impact the profitability of the business, so a degree of flexibility is necessary in every plan.
In this brief guide we outline a dozen tips covering five key decision points for a property business.
Type of property to buy
Tip 1: Compare the costs and benefits of letting commercial and residential properties.
Commercial property will generally cost more, but the lease periods will be longer and the costs of financing the purchase can be deducted in full (see tip 9). Residential property may be cheaper and easier to let, but more administration will be involved if tenants change frequently.
Tip 2: Consider the VAT payable for commercial property purchases.
No VAT will be payable on the purchase of a residential property, but commercial property can carry 20% VAT, or 0%, or the purchase may be outside the scope of VAT. Specialist VAT advice should be taken when buying commercial property.
Tip 3: Pay the land transaction tax promptly.
The deadline for reporting and paying SDLT on a purchase of a property in England or Northern Ireland is now 14 calendar days. Penalties apply if this deadline is missed. The period for paying LBTT on properties in Scotland, or LTT for purchases in Wales, is 30 calendar days in each case.
How to hold the property
Tip 4: Consider the tax profile of each owner.
When buying a property to let, check how much tax each owner will pay on the rental income, and whether any allowances will be lost by increasing the individual’s total income.
Former students with an outstanding balance on their student loan will pay 9% of the rental profits as student loan repayments if their other income already exceeds the repayment threshold for their type of loan.
Where taxable property income increases the individual’s total income above £50,000, they may have some or all of their family’s child benefit clawed back as per the high income child benefit charge.
Tip 5: Use a company to buy and hold the properties.
Property income received by a company will be taxed at 19%, compared to income tax rates of up to 45% in the hands of an individual (46% for taxpayers resident in Scotland).
A company can claim a full deduction for all interest and finance charges it incurs in relation to loans taken out to fund the property business (see tip 9).
When selling the whole property business, having it wrapped in a company will reduce the SDLT (or equivalent) for the buyer. However, a company will have to submit an annual ATED return for any residential properties it holds (see tip 7).
Tip 6: Submit ATED returns on time.
Where a company holds a residential property worth over £500,000, it must complete an ATED relief claim for each year beginning on 1 April and submit that form to HMRC by 30 April within the year. If such properties are not let or under development, an ATED charge may be payable for each period the property is not actively used. Penalties apply if the ATED returns and payments are not made on time.
How to let the property
Tip 7: Let as furnished holiday lettings.
Letting a furnished property for periods of less than 31 days to each tenant, for at least 105 days a year, can mean the property qualifies as commercial furnished holiday lettings. This allows capital allowances to be claimed on the cost of furniture and fittings, and entrepreneurs’ relief may be due on capital gains made on the disposal of the business (see tip 11).
Tip 8: Claim business rates relief
Business rates, rather than council tax, are payable for properties used for holiday lettings, but up to 100% relief can be claimed for small properties, wiping out the rates bill!
What expenses to claim
Tip 9: Interest and finance may not be deductible.
Since April 2017, the deduction of interest and finance charges paid by individual landlords of residential properties have been restricted and replaced by a 20% tax credit which is set against the landlord’s total income tax liability. If the property business is financed by significant loans it will be more tax efficient to hold residential properties within a company.
When and what to sell
Tip 10: Sell the whole business and claim entrepreneurs’ relief.
This relief allows up to £10m of the capital gains made per person to be taxed at 10% rather than 18% (basic rate taxpayer) or 28% (other taxpayers) for residential properties. However, entrepreneurs’ relief can only be claimed when selling the whole, or a substantial part, of a furnished holiday lettings business. The relief is not available when selling individual residential or commercial properties.
Tip 11: Sell the whole company.
If your property business is contained within a company, you can sell the whole company rather than the individual properties. A buyer will pay Stamp Duty at 0.5% rather than SDLT at rates of up to 15% (or LBTT at up to 16%) on each property.
You won’t be eligible to claim entrepreneurs’ relief on the sale of shares of a property investment company, but the capital gain will be taxable at 10% or 20%, rather than at 18% or 28% which is the rate of CGT payable on the sale of residential properties held in an individual’s name.
Tip 12: Do your research.
There is a lot to consider when buying and letting a property, and these tips just scratch the surfaces of the complex issues you can encounter as a landlord.