As a property owner in the UK, you are always looking for ways to increase the value of your investment. Perhaps it is time to consider a few tax-saving strategies? From the well-known Rent-a-room relief to the lesser known trick of Capital Gains Tax avoidance by moving overseas, there’s a whole host of tips waiting for you to discover.In this must-read article, we dive into the top 20 strategies for saving on taxes when it comes to property ownership. From maximising deductible expenses to using a Pension scheme to buy a commercial property, you won’t want to miss a single one.
1. Rent-A-Room Relief
This scheme allows the owner or the tenant of the property to avail of tax relief against the rental income generated by letting part of the home.
Under this relief, you can earn up to £7,500 tax-free for the year.
In case of joint ownership of the property between two individuals, the relief will be £3,750 each. But there is a catch!
Interestingly, if three or more individuals own a house in which they all live, the limit WILL NOT be subdivided by the number of owners, i.e., the limit will still be £3,750 per individual.
Conditions to be met to claim this relief:
- The home must be furnished.
- The letting must be residential.
- The owner(s) must occupy the property as the main home simultaneously as the lodger.
How Does this Relief Work?
When you avail this relief, you will only be charged tax on the rental income, which includes the amount you receive for meals, goods, and services such as cleaning or laundry above £7,500 (£3,750 in case of joint ownership).
However, you cannot claim any deduction against the expenses if you use rent-a-room relief. Therefore, any loss you make will not be allowable.
You have to make HMRC aware of electing this relief within 12 months from 31 January following the end of the tax year. So, for example, for the 2022/23 tax year, an election must be made within 31 January 2024.
Illustration 1
David lets his two rooms in his house for £150 a week each. His expenses related to rooms are £2,000. The net income from such a letting is £13,600. He will be charged tax on this income.
If David elects Rent-a-room relief, his taxable income will now be:
|
Particulars |
Amount |
|---|---|
|
Total rent (£150 x 52 weeks x 2 rooms) |
15,600 |
|
Less: Rent a room relief |
7,500 |
|
Taxable income |
8,100 |
Tips: Do not elect this relief if the rental income is less than £7,500 and your expenses are more than your rental income.
2. Sharing of Rental Income by Owning the Property Jointly
For a property jointly owned by a married couple, the rental profit is split equally by default. But if they wish, they can share rental profit in any proportion they like (so as to allocate more of rental income to the partner under lower tax rate).
In order to structure profit allocation this way, the couple need to change the beneficial ownership by filling out HMRC-Form 17 where you can jointly elect to be taxed to your actual shares.
Significant income tax savings may result from transferring the property to your lower-earning spouse in part or whole. However, this tax strategy is only successful if your spouse actually receives the beneficial title to the property.
Jointly Owned Properties | Top Tax Saving Tips
Tips: The problem arises when you want to transfer a share of the property’s income to your spouse but do not want to give a large share of the property. To resolve this, you can jointly own property under tenancy in common after taking advice from your solicitor. Then, transfer only an insubstantial share (say 1%) to your spouse, so you retain 99% ownership by preparing a formal property document (declaration of trust). Do not elect for the income to be split by the beneficial ownership percentage.
If you own property with your spouse, income will be by default split 50:50. Note that, form 17 should be filled only when you want a different proportion of income between two. Please note this is only applicable for the Spouse or Civil partners.
3. CGT Reduction on Jointly Owned Properties by Spouse/Civil Partner
Normally the capital gain tax-free allowance for 2020/21 to 2025/26 is £12,300 per individual. However, if a spouse or civil partner jointly owns a property, the capital gain allowance would now be £24,600.
For CGT purposes, spouses are treated as one person. Therefore, if you transfer your property to your spouse or civil partner, there is no CGT.
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Illustration 2
Liam has gained £55,000 from selling his investment property. He has no other gain for the year; the CGT on such gain would now be on £42,700 after an annual exemption of £12,300.
However, if Liam is the joint owner of such investment property and his wife, Laura, the CGT on such gain would now be on £30,400 instead.
4. Using the Annual Exemption and transferring the Property in stages
You can, however, transfer a residential property which is not your primary private residence to anyone in stages over several times by effectively utilising the annual exemption.
But please ensure you have consulted with a good solicitor before making this arrangement.
Illustration 3
Steve and Vanessa jointly own an investment property they plan to hand over to their only son when he is 18. The property was purchased for £55,000 in 2012.
In 2022, when their son was 18, they transferred the property to him. The market value of the property was £115,000. The gift is a transfer, and CGT will apply to this transaction.
The property’s fair market value on the date of the gift will be regarded as the sale consideration, and the CGT is payable against the gain of £70,000.
However, in 2022 instead of fully transferring the property to their son, they can transfer only 21% of the ownership utilising their joint annual allowance of £24,600.
They will subsequently transfer percentage ownership on the property to their son so that the joint annual allowance is fully utilised and continue doing so until they have entirely transferred the property tax-free.
Tip: Stamp duty land tax (SDLT) on gifts of property is not leviable as long as any outstanding mortgage against the property is not transferred or the mortgage amount is less than £125,000.
5. Private Residence Relief as CGT Avoidance Strategy
Private Residence Relief is available in certain situations which will help reduce the Capital Gains Tax (CGT) on the sale of the property.
Private Residence Relief (PRR) comes into play when you sell your residential property. Under PRR, you do not have to pay CGT on the gain made on the sale of the property.
This relief is available to you if the property has, at some time, been classed as your only or primary residence.
Full PRR is available to you if the property was your only or main home throughout your period of ownership. Similarly, PRR relief is available, proportionate to the number of days the property was your main home during your period of ownership.
From the 2021/22 tax year onwards, provided that the property was your main residence at some point, the last nine months of ownership will also always qualify for the relief.
Private Residence Relief – A Complete Guide
Illustration 4
Wayne purchased his first home in August 2009 for £65,000. He lived there until May 2018 and moved to a newer, bigger home. Then, in July 2022, he sold his first property for £135,000.
The first property was Wayne’s primary home for 106 months out of the total period of ownership of 156 months. Therefore, the house is treated as being Wayne’s principal private residence for 115 months (the 106 months he actually lived there plus the last nine months)
The amount of relief under PRR would be 115/156th of £70,000.
Tip: To claim the full PRR relief sell the property within nine months of being your primary residence, and no CGT on any gain is payable.
6. Owning Properties Through a Limited Company
Owning the properties through a company has been very popular because the company only has to pay 19% tax compared to higher personal tax rates. However, this will change starting from April 2023.
Additionally, not all companies can benefit from the 19% corporation tax rate. Please refer to our detail article on the New Corporation Tax Rates.
However, this is not fairly straightforward; in some cases, owning the property in the individual’s name will be more beneficial.
The temptation of the lower tax rate in the case of the company could blindsight you from how you would want to draw the money out of the company.
You can either pay yourself a salary or pay yourself a dividend.
In our article linked below, we have discussed more on investment in properties as an Individual or through a company.
Tip: It would be more beneficial to pay a salary to someone who does not currently have any income as the salary will be a deductible expense for the company, and the individual will not have to pay any income tax granted it is below the personal allowance.
If anything is to be paid by the employer as their NI contribution over and above the secondary threshold, it would be beneficial if such an amount is paid as a dividend. Similarly, if the individual has used up all this personal allowance, it would be effective to take a dividend in that case as well.
7. Using a Property Management Company
When you decide to invest in the property personally, you can still set up a company to use lower company tax and still own the property.
Setting up a property management company will effectively act as an agent of the property on your behalf. The charges against which are usually around 10-15% of the gross rental income.
Setting up a property management company is beneficial if you are a higher rate taxpayer, afford to leave the money in the money or pay the dividend to someone who only pays basic rate tax.
Please note that using property management company comes with other compliance cost of running it.
The rental profit of profit should be such that it does not get wiped out by the additional cost of running a limited company.
Tip: In case you cannot afford to leave the money in the business or pay the dividend to someone who only pays basic rate tax, and you are a higher rate taxpayer during the current year, you can liquidate the company and claim business asset disposal relief and only pay 10% as CGT.
8. Making the Most of Your Rental Loss
The rental loss from one property can be set off against another rental profit. However, the loss from the rental business cannot be set off against any other income.
But any excess capital allowance can be claimed against other income.
Illustration 5
Steve makes an overall rental loss of £1,200 from his two buy-to-let properties. The loss includes the capital allowance of £800 for equipment purchased during the year.
Steve also has an interest income of £900 during the year.
The capital allowance can be set up against the interest income, making it a taxable income of £100. The excess loss of £400 from the property business will be carried forward to the next tax year.
9. Avoid CGT on Gifting Holiday Homes
By now, we are well aware that a gift to anyone (except spouse or civil partner) is chargeable to CGT based on the property’s market value at the date of the gift.
However, if you have a property that qualifies as a furnished holiday letting, you may be able to take advantage of holdover relief.
Holdover relief avoids paying CGT when the property is gifted.
When you transfer the property to someone other than your spouse or civil partner by availing of the Holdover relief, you must sign a ‘gift relief election.’ Under this relief, the capital gain is passed on to the person you give the property to.
You have now been deemed that the property is sold at the cost price, so no CGT.
The recipient of the gift (let’s say your child) lives on the property and makes it or nominates it as their main residence. Your child would not have to pay any CGT if it was the main residence throughout their period of ownership.
As a result, no CGT will have to be paid in either transaction.
Tip: This holdover relief needs to be made within four years of the end of the tax year in which you make the gift. So, if you make a gift in July 2022, you have until 5 April 2027.
10. Using a trust to avoid CGT
Just discussed above, gifting of the holiday home can be exempt for CGT if proper tax planning is done. However, the same can be expanded to any property by transferring into a certain type of trust.
The property can be transferred to the discretionary trust as a gift. As with gifts, it is chargeable at the market value, but you can elect to have this gain held over, due to which you will not have to pay any CGT.
This gain will only be chargeable on any subsequent disposal by the beneficiary (or beneficiaries).
If you gift a property to a trust in which you have some sort of interest, you cannot claim gift relief. Having your minor children or spouse as a beneficiary is regarded as having some sort of interest in the trust.
Note: Transferring the property to the trust will trigger Inheritance tax either for the settlor or the trustee. However, using the trust is best if the property that is transferred is worth less than £325,000 or £650,000 if you or your spouse are transferring a jointly owned property into the discretionary trust).
11. Pay separately for fixtures and fittings to avoid SDLT
SDLT is the land tax imposed by the government on the acquisition of the chargeable interest. SDLT is payable by the buyer on the consideration paid on the acquisition.
This will be reduced when the consideration is less, but why would the seller want to sell the property at a lower value?
One way to minimise SDLT while transacting with property involving fixtures and fittings is to agree with the seller that you pay separately for any furnishings or fittings on which SDLT is not payable.
SDLT and its rates are one of the aspects that a taxpayer need to understand
Illustration 7
Frank wishes to purchase a new property worth £300,000 after selling his first home. However, Frank has to pay SDLT on the full amount at the time of purchase.
The amount of SDLT that Frank has to pay is £5,000.
The cost of the property is computed after including the furnishing or fittings worth £30,000.
If Frank wishes to make the separate payment and show this separately in the invoice, the SDLT will now be £3,500.
He, therefore, saved himself £1,500 on SDLT.
Note: Ensure you are invoiced separately for the property and furnishings when buying a furnished property.Furnishings are moveable items that should not be part of the property’s value while computing SDLT.
12. Inheritance Tax Planning by Giving Away the Property but Continuing to Live in it
Any gift you make except as a chargeable lifetime transfer is free of IHT if you manage to survive seven years after making the gift.
The gift with reservation of benefit rules prevents a donor from giving away an asset but continuing to derive some benefit from it.
The effect of GWROB is that the asset is treated as still forming part of the donor’s estate at death.
You can still live in the property but not regard that property as your party of the estate if you pay the market value of rent to the new owner, who will be taxable to the new owner.
However, tax planning can be done in this situation.
Rather than giving away the whole house, you could give away a proportion of it. The recipient (say your child) will live in the house with you sharing the running cost. The part given away will not be regarded as your estate if you survive seven years from the date of giving it to your child.
Whether you want to avoid inheritance tax or learn about it in detail, we have you covered.
Note: To avail of the IHT benefit, you must show that you have not received any undue benefit even after giving away the property. You should have a joint bank account with your child to deal with the running cost of the property. The running cost must be divided between you and your child appropriately.Please note that this will not be applicable if your child moves out of the property. In that case, you have to pay the market value of rent; otherwise, there would be a reservation of benefit.
13. Re-mortgage the Property to Avoid the CGT
This strategy is useful when your investment property has significantly increased in value, and you want to take out some of the money you have invested without paying any taxes.
The first thing that comes to our mind is to sell the property.
But, when you sell the property, you will have to pay CGT on such a transaction.
Rather than selling the property, you could just benefit from the increase in the fair value by re-mortgaging the property.
Re-mortgaging, as the name suggests, is mortgaging against already mortgaged property.
This is best elaborated with the help of the following example:
Illustration 8
You bought a house for £250,000 with 80% financed by a mortgage. Meaning you own 20% of the house.
After a few years, the property’s value has increased to £300,000. During these years, you have paid £20,000 of your mortgage. The mortgage standing is now £180,000.
You have re-mortgaged the property for 70% at the current market value of £300,000.
This way, you have paid the original mortgage of £200,000 and still have £10,000 that you can spend elsewhere.
Also, you now own 30% of the property.
CGT will be ultimately payable when you sell off the property, and the gain will be the difference between the original cost and the sale consideration, not the outstanding mortgage amount.
Make sure you make the arrangement so that the equity you have on the property can still repay the CGT.
Note: It is not always rainbow and butterflies; even if you own more percentage of the property, you still own a larger mortgage which results in potentially higher repayment.A general rule of thumb is the maximum amount of a re-mortgage loan should be the original cost plus 70% of any increase in value.
14. Maximising Your Deductible Expenses
Capital expenditures are not allowed as deductions while computing the taxable property income. However, the costs you incur in the day-to-day running of your property investment business are not capital expenses and can be deducted from your rental income.
Costs incurred in significantly improving the property are considered capital and cannot be deducted.
The distinction between repair and improvement is complicated as repairs are tax deductible, but improvement costs are not.
Even though the improvement cost cannot be deducted against the rental income, it can be deducted while computing the CGT at the time of transfer of the property.
Note: As capital cost or cost of improvement are generally one-off in nature, instead of making the payment all at once, you can undertake a rolling programme of improvement; this is more likely to get allowed as a repair and, therefore, tax deductible. Also, ask the vendor/contractor for a fully itemised invoice so that you can easily identify the allowable repair cost.
15. Using a Pension scheme to buy a Commercial Property.
Self-invested personal pension (SIPP) results in saving and earning interest on the pool of money you have set aside when you retire.
SIPP is basically similar to any other pension scheme but allows more flexibility and control over what your contribution is invested in.
You can invest in commercial property from SIPP.
The main advantage of a pension scheme is that the income earned from such a pension is tax-free.
A pension scheme can be helpful by financing the fund to acquire your own commercial property.
The commercial property so purchased can then be leased back to your company.
Any rental income earned from such leasing would be tax-free as this is regarded as being generated from your pension scheme.
In addition, if you later sell the property in the pension scheme, you do not have to pay any CGT on such gain.
You can still claim the rental expenses deducted against the income in the business where you have leased such property.
So double benefit.
Please be aware that SIPP management fees are much greater than those of other plans. Consequently, rather than a pretty simple put aside to save the tax, this is a cost-benefit study.
From his company’s point of view, the rent is also tax deductible.
Illustration 9
David has a business and wants to acquire a new commercial property for it. However, instead of owning the property personally, he wishes to use the Pension contribution he had set aside.
David uses his pension contribution to purchase the new commercial property and later lease to his business.
The pension earns him an annual rental income of £80,000. This income is tax-free.
Note: A SIPP scheme can borrow up to 50% of the scheme’s net fund value before borrowing has taken place. Meaning, that if you have set aside £100,000 on your pension scheme, you can borrow an additional £50,000. Even if the property’s value decreases to such an extent that the outstanding loan amount comes to over 50%, the loan would not be an unauthorised payment.
16. CGT offset of Property Gain Against Stock Market Loss
Capital gain on the sale of the property can be troublesome for the taxpayer, especially when you consider the tax rate to be 18% or 28% on the sale of residential property compared to 10% or 20% for other capital assets.
CGT applies to the transaction of shares trading in the stock market.
You can take advantage of this by offsetting any loss on selling such shares with the gain you make on selling your property.
The previous year’s loss can be adjusted against the current year’s property gain as long as this loss has been shown in the tax return of the year in which sale was made.
Another point to consider is that you can claim the loss even if you did not sell the shares. HMRC must agree that the quoted share is effectively worthless to claim this.
You can check the HMRC’s negligible value list.
If the shares are included in the list, then you can make a claim for the shares to be treated as though you sold them on the date you made a claim or up to two years before the tax year in which you made a claim.
Note: Claim CGT loss any time after the shares have become worthless. It is best to defer the claim until the capital gain exceeds the annual exemption limit.
17. VAT Planning for Property Investors
VAT on commercial letting is exempt.
Exempt land and building supplies often cause problems because the huge input tax incurred in the purchase is irrecoverable.
Option to tax allows businesses to charge VAT on the transaction which was previously exempted.
The option allows the trader to choose to eliminate the exempt supply and instead opt to turn it into a standard related taxable supply.
Once opted, any related input tax can be recovered in full because the supply being made is now taxable supply.
However, the option to tax is applied on building to building basis. Therefore, the owner can opt to tax on one building and choose not to make such opting on another property.
VAT on Property Explained: A Complete Guide
Our comprehensive guide to VAT on property provides essential information for property investors and developers.
Illustration 9
Alex owns a commercial property. He has let the ground floor to an accountancy firm and the first floor to an insurance company.
Alex incurred £500,000 on the renovation of the building. The builder invoiced Alex of the sum plus VAT.
To claim back the input VAT of £100,000 paid for such renovation, Alex can opt for tax on his supply.
If he opts for ‘Option to tax’, Alex will have to issue an invoice to the accountancy firm and insurance company for rent plus VAT.
Since the first floor is let out to an insurance company, the input tax paid against the rental expenses by the company will not be recoverable as the outward supply by the insurance company is exempt supplies.
18. Utilising Capital Allowance
For commercial property (including furnished holiday accommodation), you can claim capital allowance on the acquisition on purchase of certain qualifying assets used exclusively for business against the rental income.
This allowance can be claimed by companies as well as by sole proprietors.
Capital allowance is available irrespective of when you buy the qualifying asset. Therefore, it is possible in most situations to claim missed allowance. The main condition to be eligible to claim this allowance is that such qualifying asset must be in use currently.
For a property business, furniture and fixture is the main qualifying asset eligible for capital allowance.
So, what are the other qualifying expenditure eligible for the capital allowance in case of a property transaction?
Besides furniture and fittings, for the commercial property, other qualifying assets are plant & machinery like heating and cooling systems, emergency lighting, security system, etc.
19. Cost of Replacing Domestic Items
If you are into residential letting, you can claim a deduction against the cost incurred for replacing the domestic items.
Some of the examples of domestic items are moveable furniture, furnishings, household appliances, kitchenware, etc.
The capital allowance on the furniture is not available for residential property. Still, if you replace your residential property’s furniture (domestic item) with the new furniture, you can claim relief against this.
You can claim relief when:
- You carry on a property business that includes the letting of a dwelling-houses.
- An old domestic item provided for use in the dwelling-house is replaced with the purchase of a new domestic item and:
- It’s provided for the exclusive use of the lessee in that dwelling-house
- The old item must no longer be available for use by the lessee.
- The expenditure on the new item must not be prohibited by the wholly and exclusive rule but would otherwise be prohibited by the capital expenditure rule.
- Capital allowances must not have been claimed for the expenditure on the new domestic item.
20. CGT Avoidance by Moving Overseas
If you sold a commercial property that you owned when you lived in the UK prior to 6 April 2019, then you will not be liable to UK CGT as long as you stay non resident for five full tax year.
However, if you sold your property before 6 April 2019 while you were non-resident, but you returned to the UK within five years, you will have to pay CGT on sale of the property in the tax year you return.
How Can Someone be Treated as a UK Resident for Tax Purpose?
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