DNS-Accountants

Is a rental property considered a business?

This is a question we often get asked. The answer is that generally if you own a rental property or rental properties that is your primary source of income, or if you own more than one rental property and acquire more properties with the intention of letting them out, then that is considered a business.

There are different rules for Rent a Room, Furnished Holiday Lettings, Hotels and Guest Houses which we wont discuss in this article.

Is a rental property considered a business?

Most landlords buying their first property in their own personal name. However, if you purchase more rental properties and begin to earn more income from property rental, then its worth considering if you operate as a limited company as there may be tax advantages of doing this.

Buy to let property

Residential property that you buy, or keep, for the purposes of renting out, e.g. houses or flats, is generally called buy to let.

Following tax changes by HMRC, many investors are changing structure when buying rental properties to ensure this income is not earn personally. Hence the most popular structure for a residential property portfolio with lots of finance is a limited company. For a small property portfolio, with little or no finance then a limited company may be overcomplicating the position.

Structures for buy to let property

Before purchasing a property, its worth considering the following:

For example why are you buying the property, how will you finance it, how much income will it generate, are you buying it for the short or long term?

The main two routes for being are landlord are sole personal ownership and Limited Company, However there are other options that we wont cover in this article which are:

  • Sole Personal Ownership.
  • Joint Tenants in Common.
  • Partnership.
  • Limited Liability Partnership.
  • Limited Company.
  • Pension Fund Trust.

What is a ‘Private Landlord’?

For many people starting out as a landlord, they operate as a ‘Private Landlord’. This is when a landlord owns their property in their own personal name. For tax purposes you would be seen as a ‘Private Landlord’. However, there are still tax implications if you rent out property as a Private Landlord.

Tax Implications for Property Business Owners

Overview of taxes on property rental income :

The Income Tax Act has categorized an individual’s income into five distinct heads to streamline tax computation. One of these is income derived from house property, which typically includes the rental income received from letting out residential properties.

Rental income is subject to taxation, but certain deductions are allowed to calculate the taxable amount. These include:

  1. Municipal Taxes: Any taxes paid to the local authority.

  2. Standard Deduction: A flat 30% deduction on the net annual value of the property.

  3. Home Loan Interest: Interest paid on an ongoing home loan related to the rented property.

By considering these deductions, the taxable income from house property is determined. This ensures fairness in taxation while recognizing the associated costs borne by the property owner.

Explanation of capital gains tax on rental property when selling.

Overview of Capital Gains Tax on Rental Property

When a UK rental property is sold, any profit earned from the sale falls under capital gains on rental property, which is subject to specific tax rules. The tax liability depends on the holding period of the property, classifying the profit as either a short-term capital gain (STCG) or a long-term capital gain (LTCG).

  1. Short-Term Capital Gain (STCG):

    • Applicable when the property is sold within 24 months of purchase.
    • The profit is added to the seller’s total income and taxed according to their applicable income tax rate.
  2. Long-Term Capital Gain (LTCG):

    • Applicable when the property is held for more than 24 months.
    • Taxed at a flat rate of 20%, with indexation benefits applied to adjust the purchase price for inflation.

Deductions and Exemptions

Property owners engaged in the property business can reduce taxable LTCG by reinvesting the proceeds into eligible options, such as:

  • Section 54: Purchasing or constructing another residential property.
  • Section 54EC: Investing in government-approved bonds within six months of the sale.

Understanding the tax implications of selling a UK rental property ensures informed decisions and effective tax planning, helping property owners minimize their liability.

Sole personal ownership of property

One person owning a property is usually the way people start as a property owner. It can be the simplest, especially if you have money in the bank to make the purchase. However, if you are not living in the whole property, the whole time or are intending to rent out the whole property then there can be more tax efficient options. Note: if you are developing the property to sell, then you will be classed as a sole trader business.

Advantages of sole personal ownership of property

There can be advantages of owning a property personally. These are:

  • Simpler to run than under a limited company structure.
  • Everything is your personal responsibility – income, bills, taxes.
  • No tax on sale if you lived in the property as your main family home for whole period of ownership.
  • Capital gains tax free allowance on sale.

Advantages of sole personal ownership of property

  • National insurance and income tax if developing the property for gain.
  • Reduced tax deduction for interest if renting residential property.
  • Less flexibility – all income and tax is yours.

Owning a property through a limited company

A limited company is a type of business structure, which is incorporated into a legally distinct body. If an individual opts to own and run the property business as a limited company, the business will:

  • be legally distinct from the person responsible for running the business.
  • maintain separate finances for both business and personal finances.
  • own assets, such as the property.

Owning investment property via a limited company has become a very tax efficient way of working in recent years, especially if requiring bank finance.

Advantages of owning buy to let property through a limited company:

  • Full tax deduction for finance interest on residential properties.
  • Ability to share income with other parties.
  • Flexibility to earn or make gains spasmodically, and spread personal tax liabilities.
  • Flexibility and lower average tax rates on withdrawals.
  • Financial control of your money.
  • Ability to maintain a separate pool of assets at low tax rates.

Disadvantages of owning buy to let property through a limited company

  • No capital gains tax allowances.
  • Admin – you must be diligent to avoid penalties.
  • Annual Tax on Enveloped Dwellings (ATED) is charged on larger residences.
Start Your Limited Company with Ease

Don’t let paperwork slow you down! Let our team handle the setup of your limited
company for property rental.

Property tax differences between personally owned and limited company owned properties

If you just use your property as your main family home and have no other home, then you are unlikely to have any further tax to pay on that property. However, if youre renting the property out for profit then you need to be aware of tax implications.

Personally owned properties

Property taxes on personally owned property is more straightforward than a limited company. You simply deduct your allowable expenses from your rental income to work out your profit. You will then pay income tax at your normal rate on any profit you make.

There are some differences around what expenses you can claim if you personally own a property. For example, you cant claim mortgage interest as an expense on personally owned properties. Instead, you receive a basic rate reduction of 20% from your tax liability for any mortgage interest payments and other financing costs.

Below are details of the main areas of tax you need to consider when renting out buy to let property.

Income tax

All property income, net of expenses, is subject to income tax annually. A limited company will pay corporation tax, but all other structures pay income tax on this income. Trading income of an individual is also subject to national insurance.

Capital Gains Tax on Rental Properties

Capital Gains Tax (CGT) comes into play when you sell or dispose of an asset, such as a rental property, for a profit. However, CGT does not usually apply to your primary residence unless part of the property has been rented out or used for business purposes. For landlords and property investors, CGT becomes a key consideration, as it applies to the sale of rental properties that have been let to tenants. Understanding the tax implications before selling can help you plan effectively and minimize your liabilities.

Commercial Rental Properties vs Residential Rental Properties

When investing in commercial rental properties (like offices or retail spaces), you’ll face different management requirements and tax implications compared to residential rental properties (such as houses or flats). Commercial properties often offer longer leases and higher yields, but come with higher upfront costs. Residential properties, while generally lower yielding, tend to be easier to finance and manage. Understanding these differences is crucial for choosing the right investment for your portfolio.

Corporation Tax Annual Tax on Enveloped Dwellings (ATED)

A UK dwelling valued at over £500,000, owned wholly or partly by a company, is subject to Annual Tax on Enveloped Dwellings (ATED) – based on property value.

Exemptions from this tax are available e.g. for property management or property development, but the exemption must be claimed on the annual submission.

Inheritance tax

Investment property is an asset for inheritance tax purposes.

Shares in a company that only owns investment property are also investment property for inheritance tax purposes, even if that property is a small close company.

Additionally, investment property may change the nature of a trading company for capital taxes purposes, such that higher taxes are due. Transfer of properties to a company can also incur inheritance tax, at lifetime rates, if full consideration is not received or the company is owned by different parties.

Planning for succession is recommended.

Our advice if you are considering buying and renting out property is to consider you reasons for doing it and whether this is a long term investment and whether youll add to this property portfolio. Seek professional advice early to find the best structure for you to own and rent out the property as this professional advice could save you money in tax and reduce your tax liability.

If youd like more advice on owning and renting out property, then speak to our specialist landlord team today on 03330 886 686 or e-mail us enquiry@dnsaccountants.co.uk.

Speak with an expert

Any questions? Schedule a call with one of our experts.

About the author
Blog Author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.

  • Book a free consultation
Receive accounting news and updates in your inbox

About the author
Blog Author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.

DNS-Accountants

See how dns can help
you today.

Save tax
Save tax

Our experts will work with you to reduce your corporation, personal or any other tax liability, all within the rules of the UK tax legislations. We’ll ensure you’re claiming all allowances and expense claims that you would be elegible for.

Reduce your admin
Reduce your admin

We give free software to all of our clients. You’ll be able to raise sales invoices, snap pictures of receipts and be MTD compliant with ease. You can even manage your business anywhere there’s an internet connection, thanks to our mobile app!

Grow your business
Grow your business

Successful business owners are those that are on top of their numbers. Businesses are driven by the numbers behind them. If you’re not reviewing your profit & loss or balance sheet regularly, how would you know how your business has performed and how would you make proper business decisions? We can help you make sense of your numbers.

Free Business Software!

Limited time only!

Free Business Software

Say Goodbye to Bookkeeping Hassles: Nomi offers Free Receipt Processing and big savings!

  • Built in payment solutions.
  • Track profitability, debtors and creditors
  • Snap pics of receipts with the mobile app
  • Free Receipt Processing
  • Hasslefree Bookkeeping
  • Cost Reduction
Get Started
Closenomi