Starting up as a landlord – Tax issues to consider#AskAMS

When starting up as a landlord there are a number of issues and tax implications to bear in mind:

1. Decide on what investment property to buy.  This is obviously the most basic decision and the key decision.

2. Decide how to own it – on your own, with a partner, or through a limited company.

3. This is a key decision.  It depends on your long-term plans, your other income, whether you need finance, and whether you are owning the company for capital growth or extra income – or both – and is worth discussing with an accountant.

4. If you are buying a property with someone – a friend or a spouse – you need to work out whether to own the property as Joint Tenants (automatically income is split 50:50; if one person dies, the other automatically inherits their half.  This often suits married couples but is not a good idea for friends buying together) or as Tenants in Common (income and ownership is split by agreement and each portion can be sold separately).  You should definitely take legal advice on this point – but almost any solicitor should bring this up. 

5. If you want to reinvest any rental income into further properties this may favour having a limited company.  This is because individuals will pay income tax on rental income of up to 45%, whereas companies pay Corporation Tax of (currently) only 19% - leaving more of the cash available for reinvestment within the company.

6. It used to be much easier to get a mortgage as an individual rather than as a limited company.  However, this seems to have changed in the last few years - which is a good thing for many investors because they get full tax relief on mortgages in company owned investment properties whereas individuals only get a tax deduction of 20% of the mortgage interest paid.  This particularly affects investors who are higher rate taxpayers.

7. If buying a property for holiday letting – or a property that you intend to rent out via AirBnB – there are many other issues to consider. You need to make sure your lender knows what you are doing. You need to make sure that you have the right sort of insurance.  If you own the property with someone else, you may want to split the profit in a way that takes account of the work done in running the business and not just ownership split.  And you need to keep an eye on the rents received in case their total approaches the VAT registration threshold of £85,000 in 12 months. You will effectively be running a trade and should really consult an accountant because there are more issues to consider.

8. It is worth knowing that any capital gain made on selling an investment property will be taxed at 19% if owned by a limited company (based on current rates in 2021/22).  You then have to get the profit out of the company, generally as dividends – which could mean either an extra 7.5% income tax or, if you are a higher rate taxpayer, an extra 32.5% in tax.  So this could mean tax of about 45% of the gain.  In contrast, any capital gain made as an individual will only be taxed at 18%, or 28% if the gain pushes you into higher rate income tax, and the first £12,300 of capital gains in a tax year is tax-free on an individual.

9. If you plan to buy properties to ‘do up’, sell on and make a profit (perhaps after refurbishing them) – rather than keep them for rental income - you will not be making capital gains but will be treated as trading in property - which means that profits will be taxed like income rather than capital.  Selling one property shortly after its purchase could be seen as a change of mind and a genuine capital gain.  But to do this a second time soon after would look like you were trading rather than owning investments.

So, there are tax advantages and tax disadvantages however you own an investment property and these need to be carefully weighed up.  There is no ‘one size fits all’ solution.

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