How to save tax on rental income with careful tax planning

How to save tax on rental income with careful tax planning

Whether letting out one property or a hundred, individuals operating a home rental business have to pay tax on rental income received. This is 20% for basic rate taxpayers, and 40% tax if you fall into the higher rate tax band.

Furthermore, with recent changes to the tax law for landlords, there is a cap on the amount of mortgage interest you can use to offset against the rental income before calculating your tax due. And an extra 3% stamp duty land tax charge on buying a second property. It’s not as easy to save money as it used to be.

If you have money invested in property to let, you can consider two options to save tax:

Option 1 – Form a limited company to buy a property or to transfer an investment property to.

Using this strategy you will be able to earn dividends through the limited company. This will be more tax-efficient compared to traditional rental income profits. Corporation tax is paid at 19% compared to income tax at 20% or 40%. You will also be able to claim all rental expenses as business costs.

There are a few disadvantages to using this strategy:

1. The company cannot claim annual exemption allowance.

2. Getting a mortgage using a limited company is more expensive compared to a personal mortgage.

3. Transferring a property from your personal name into a limited liability company may trigger Capital Gains Tax.

Option 2 – Set up a property management company.

You can set up a management company to operate as a letting agent, with you (the investor) being the director of the company. You can also employ your spouse, if not working, to help you with running the management company and pay them through the company’s payroll system.

The management company will provide all the services the rented property needs: cleaning, advertisement, maintenance, administration of rent collection, etc. So, it can also charge the investor a service charge fee for managing the company on their behalf.

The management company may charge 14% of rental income as a service charge. The investor can claim the fees as expenses, reducing their tax exposure.


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