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.
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.
- 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.
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.
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.
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
At some stage you may want to sell your investment. When you sell a property then you may receive more or less than you paid for it. The difference between selling price and purchase price is your basic capital gain and you will pay capital gains tax on any gain you make.
The exception is if the property is part of the trading activities such as property development, in which case the gain will be classed as trading income and taxed accordingly.
Costs of buying and selling are allowable deductions for capital gains tax purposes from this gain before it is taxable.
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.
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 firstname.lastname@example.org.
Any questions? Schedule a call with one of our experts.
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