Property Tax
How to save tax on Buy-To-Let Property?
Joint property: income splitting
You can own land and property with two forms of joint ownership:
- Tenants in common: Each of you own your own share of the property. On your death your share may be passed to another by will or under the intestacy rules.
- Joint tenants: Each of you have an interest in the property but do not have a share of the property as such. This means that you cannot mortgage your own interest in the property. On your death the property passes by survivorship directly to the surviving joint tenant(s).
How to reduce your income tax on the property income ?
when you own a property jointly with your spouse or civil partner, the property is treated as being owned in equal shares ie 50:50:
- Each of you are automatically treated as receiving, and are taxed on half of the income arising from the property.
- For the 50:50 treatment, you need to own a property in joint names, or alternatively need an evidence of beneficial joint ownership.
- If you are joint unmarried owners of property, you pay for tax according to your actual beneficial ownership.
- When you don’t want to be taxed on equal share of property income ie 50:50, you, as a joint ownership (under tenants in common NOT joint tenants), as a married couples or civil partners, can make a joint property election with Form 17 in order to be taxed according to your beneficial interests other than 50:50 to save income tax.
- Where jointly owned property is held in a single name you need a Declaration of Trust for an evidence of joint beneficial interest for other than 50:50.
Property & Trading allowance
From 6 April 2017, you receive two new annual tax allowances of £1,000, the ‘Trading and Property Allowances’, which means that if your gross property or trading income is under £1,000 then you don’t pay for tax nor need to notify HMRC.
However, if gross income exceeds £1,000, you must register for Self Assessment and may elect to deduct the £1,000 allowance instead of allowable deduction by the first anniversary of 31 January following the end of the tax year.
- The allowance is not available to partners in partnership but allowed to joint ownership.
Where you claim mortgage interest by way of a tax reducer, the property allowance will not be available.
Rent-A-Room relief
- If you rent a room in your own residence and gross rent is not more than £7,500 per house, you are free of tax as ‘Rent-a-room relief‘ applies automatically.
The £7,500 threshold applies per property and not per tenant. If you own a property jointly, each of you have half the ‘Rent-a-room relief’ (even if the rents are apportioned differently).
Property Business Losses
If you have a property business loss, that loss can only be carried forward and set against property income from a UK property business in future tax years. You cannot set a property business loss against non rental income. You cannot carry the loss back to a previous tax year against property income either.
What are Deductible Expenses for property tax?
What expenses can I deduct against property income?
- You can deduct cost incurred wholly and necessarily for property business purposes.
- You cannot deduct any cost of capital nature ie enduring benefit for your business and enhancement to the value of the property like initial cost of acquisition of a property including legal cost, enhancement or improvement cost but you can deduct them for Capital Gain Tax on future sale of the property.
- You can deduct general expenditure against property income such as advertising for new tenant, bad debts, agency fees, maintenance/repair, legal fees for short term renewal, insurance & travel expense etc.
Replacement of Domestic Items Relief (RDI):
- You can deduct cost only for the like-for-like replacement cost of domestic items but not initial cost of the purchase.
- You cannot deduct RDI to the extent that the replacement item is an improvement on the original item
What are Replacement of domestic items (RDI)?
- Moveable furniture such as beds and free-standing wardrobes.
- Furnishings such as carpets, curtains and linen.
- Household appliances such as televisions, fridges and freezers.
- Kitchenware such as crockery and cutlery
Restrictions on Mortgage Interest (finance cost) Relief:
From April 2017, you can claim restricted tax relief on mortgage interest and other finance costs on buy-to-let residential property (Dwelling) ie no restriction on commercial property. You can deduct the expense at basic rate as a tax reduction, not an allowable expense.
Therefore, you can claim a basic rate tax reduction from your Income Tax liability at 20% on lowest of :
- Finance costs not deducted from income in the tax year (plus unused finance cost from previous years).
- Profits of the property business in the tax year (less losses brought forward).
- Adjusted total income (excluding savings income and dividend income less personal allowance/blind person’s allowance) .
You can carry forward any excess finance costs to following years.
What is Furnished holiday letting (FHL)?
Where furnished residential property is let commercially meeting certain conditions, it’s qualified for Furnished Holiday Letting.
- From April 2025, Furnished Holiday Letting will be abolished as per Spring Budget 2024.
- You don’t need to pay for National Insurance (NICs) on Furnished Holiday Letting profits as it’s treated as investment income. However, you cannot off set Furnished Holiday Letting losses against other income for class 4 NIC purposes.
- Unlike an ordinary letting business, you can claim Capital Allowances on furniture & fixtures and other plant and machinery used in a Furnished Holiday Letting property.
- You can only carry forward Furnished Holiday Letting loss against profits made from the same UK or European holiday business.
- You can claim Capital Gains Tax (CGT) ‘Business Asset Disposable Relief” (ABDR) and other CGT reliefs such as roll-over and gift relief for the disposal of business assets.
- You may qualify Business Property Relief (BPR) for Inheritance Tax if you provided substantial additional services in addition to property letting.
- Where you own Furnished Holiday Letting jointly as spouses/civil partners, you will pay for tax according to beneficial interest, not automatically split 50:50 between you.
Conditions for Furnished Holiday Letting:
- The property is furnished and residential.
- The property must be located in the UK or European Economic Area (EEA) (this includes Iceland, Liechtenstein and Norway).
- The property must be available for commercial letting as holiday accommodation to the public for at least 210 days and actual let for 105 days in the relevant 12 months period.
- You shouldn’t let to the same person for more than 31 days at one time and the longer-terms let cannot exceed 155 days in the tax year.
- You can meet the 105 days of actual let test by making election to average period, where you have multiple properties.
- Where you fail in qualifying letting period in the year, you can elect for ‘period of grace’ providing conditions were met for previous year and it’s deemed be qualified.
- You must make each election by 31 January following the end of the tax year.