Easy ways to pay less tax that every landlord should know

It will be crucial for landlords to protect their profits in 2023 amid growing red tape and a mortgage affordability crunch.

Inflated interest rates, rising taxes and looming regulatory changes will sting investors over the coming years – a bill which will run into tens of thousands of pounds if proposed changes to minimum energy efficiency standards in rental properties are confirmed.

Despite this, huge tenant demand, rising rents and falling house prices mean there are still promising yields to be had in buy-to-let investment. 

But landlords will need to box clever and ensure the numbers add up, starting with their tax bill – here’s how.

Hold properties in a company

A growing number of landlords are holding their properties in a company structure, enticed by promising tax benefits – from 2016 to 2020, more buy-to-let companies were set up than in the previous 50 years combined.

Incorporations have exploded since the Government started to phase out tax relief on buy-to-let mortgages in 2017. Previously, all landlords could offset their mortgage interest payments against their tax bills, but since April 2020 they have received only a 20pc tax credit.

If they own their properties in a company structure, however, they can still offset all their interest.

David Fell, of estate agency Hamptons, said: “Perhaps the biggest benefit of a company structure is that all mortgage interest can be offset against tax.”

Landlords in a company also pay corporation tax at 25pc instead of income tax at 40pc (for higher-rate taxpayers) – making them some of the most tax-efficient portfolios in the country.

Chris Etherington, of accountancy firm RSM, said: “With rising interest rates and mortgage costs, we are seeing a lot more enquiries from landlords looking at wanting to transfer their property portfolios to a company.”  

But he warned there were several tax pitfalls which could result in a substantial tax bill if not navigated properly.

Anyone moving existing properties into a company structure will technically need to “sell” their property to the limited company, meaning they pay both capital gains tax and stamp duty.

Mr Etherington said: “As well as a stamp tax cost, a big barrier for landlords wanting to transfer their properties into a company is capital gains tax.

“This liability can sometimes be reduced to nil if the landlord qualifies for incorporation relief – benefitting from it is complicated, but often worth exploring by landlords with larger portfolios run as a business.”

Mr Fell said there were further downsides to incorporating, such as higher accountancy costs when filing company results and higher mortgage interest rates.

He added: “While a company can be set up relatively quickly and cheaply, the property must be sold to the company at market rate, which will require an independent valuation for stamp duty purposes.

“If the property is mortgaged, this transfer will also require the lender’s consent. Some buy-to-let lenders won’t lend to a company, meaning it’s usually best to transfer the property when the mortgage reaches the end of a fixed term.”

It is worth noting that the recent corporation tax increase only applies to companies with profits of more than £50,000 a year, meaning landlords below this threshold will be protected and continue to pay the previous 19pc rate.

Change the split of ownership

Mr Etherington said: “Married couples and civil partners could change the split of ownership on their buy-to-let property – which can bring tax benefits.”

For married couples or civil partners who own a rental property, the standard policy of HM Revenue & Customs is to split any rental income on a 50:50 basis. This means any rental profits are taxed equally for each partner.

“Unfortunately, that standard treatment isn’t always good news for the couple from a tax perspective. For example, if one partner earns more than the other, it often makes sense for the lower earner to receive more of the rental profits,” Mr Etherington said.

There are two reasons for this. It may be because the lower-earner is not using their full personal allowance or because they are in a lower tax bracket. 

“Similarly, if one of them is a higher-rate taxpayer and the rental property has a mortgage, they may not be getting full tax relief for the mortgage interest, whereas their spouse or civil partner would,” he added.

Gifting a property to a spouse if it still has a mortgage attached can trigger a property stamp tax cost – but it could be cheaper to do this now rather than later ahead of any future stamp tax hikes.