January is a time when tax is front of mind for many people, given the annual deadline for self-assessment returns.
If you yourself have been looking at the numbers from your property portfolio, and it’s making you ponder whether to add further properties to it in 2022, don’t forget that there are other tax liabilities beyond income tax on your rental income.
Here’s a reminder of the latest tax rules that may affect an expanded property portfolio.
You are probably up to speed on income tax on your rental income, but just in case:
Everyone has a property allowance which permits the first £1,000 of rental income to be tax free. After that, rental income is added on to your income tax bill and taxed at your marginal rate.
Alternatively, you can deduct your allowable expenses. Unfortunately, though, you can’t do both and you need to meet certain rules to be eligible for the property allowance.
If buying more rental property, be mindful whether it will move you up a tax bracket.
Stamp duty and land transaction tax
The next tax you need to consider is usually called the stamp duty land tax. That, however, only applies to England and Northern Ireland, as it is a devolved tax throughout the UK.
So, if you buy a property in Wales, you will need to instead know about the land transaction tax (LTT). In Scotland, you will need the land and buildings transaction tax.
The two are very similar in practice, charging extra for purchases of property that is not your primary residence. The English and Northern Irish stamp duty simply adds an extra 3% to whichever rates you pay, which you can find here.
LTT, meanwhile, taxes primary and secondary property purchases using different bands – basic and higher respectively.
As property accountants in Wales, we’ve taken the time to put together the rates in one convenient table to show what tax you may have to pay if you buy residential property over here:
|Price threshold||Basic LTT||Higher LTT|
|£1 to £180,000||0%||3%|
|£180,001 to £250,000||0%||6.5%|
|£250,001 to £400,000||5%||8%|
|£400,001 to £750,000||7.5%||10.5%|
|£750,001 to £1,500,000||10%||13%|
|Portion over £1,500,000||12%||15%|
If HMRC thinks you are running a property business and you make £6,515 or more a year, you might have to pay class 2 National Insurance.
It can be tricky to define what exactly makes a business a business, but HMRC gives an example. According to them, your letting activities will be defined as a business if all the following apply:
- being a landlord is your main job
- you rent out more than one property
- you’re buying new properties to rent out
So, just owning one property, and doing work like arranging repairs and arranging tenancy agreements won’t necessarily mean you have to fork out cash for National Insurance contributions.
If you have a particularly large portfolio and busy schedule looking after your properties, it is worth checking with us to gauge whether we think HMRC will require you to pay.
Is it worth managing the tax liability through a limited company?
Switching to a limited company structure to manage your property portfolio may help your tax position depending on your circumstances.
First your profits will be taxed at a flat rate of 19% in corporation tax, rather than a 20%, 40% or 45% income tax charge you would usually face.
You may also be able to pay yourself in a more tax-efficient way if you operate through a limited company.
Many people do this by keeping their salary below the primary threshold for National Insurance (£9,568 in the 2021/22 tax year), but above the lower earnings limit (currently £6,515).
That way, you won’t have to make National Insurance payments but remain entitled to benefits and the state pension.
You can then top up your income with dividends, which are taxed at a lower rate than income and there is no National Insurance on them, which could be particularly useful if HMRC has deemed you to be running a property business.
Your properties will also no longer be in your name, but the company’s, which means there are fewer restrictions on the allowability of mortgage interest.
This limited liability on your end also gives you the peace of mind your assets are safe, even if things go wrong for the company. There will, however, be more admin and compliance (which your accountant can help with).
Furthermore, if you have properties before incorporating your business, you will have to, in effect, sell them to your company, which could run the risk of a hefty capital gains tax charge if you have made a capital gain.
There are allowances and ways to manage capital gains tax, but the headline rates on property gains are 18% for basic rate taxpayers and 28% for higher rate taxpayers. If you’ve held a number of properties for many years, the tax bill could be significant.
Tax advice on your property options
We are always here to help if you wish to discuss your tax position. By talking things through with our experts you will be able to find the best way forward for your circumstances.