Taxation of Property & Property Income for Self-Employed and Limited Companies
The tax consequences of owning and letting a UK property depends on a variety of factors with the tax implications being determined by how the property is held, either by an individual, a trust or a limited company.
In terms of purchasing a rental property, we are all well aware of the Stamp Duty Land Tax (SDLT) that is charged when we buy a residential property in the UK, otherwise known as the Land & Buildings Transaction Tax (LBBT) if you live in Scotland or Land Transaction Tax (LTT) if you live in Wales.
There are also tax reliefs available to first time buyers, who benefit from no stamp duty tax on the first £300,000 of the purchase price. It is worth noting that worldwide property ownership is considered by the taxman when being assessed as a first time buyer, and if a property is being bought jointly, both individuals must be classed as first time buyers to be eligible for this valuable tax relief.So what is the difference between the taxation of a UK property which is rented out and therefore generating income, for an individual, a trust or a company?
Let's take a look below.
Individuals
It is more common for landlords to operate through a limited company structure versus a self-employed sole trader or partnership set-up because income tax rates for individuals are higher than corporation tax rates for limited companies.
However, if you have no other taxable income, you would probably pay very little income tax on the rent received from a single property of modest value. Individuals pay income tax at graduated rates, whereas companies generally pay a flat rate on all their income and their capital gains currently set at 19%.
If an individual owns and decides to let a UK property whilst they are still in full time employment, they will only need to pay tax on the profit they make from renting the property. As a landlord, you are not liable for council tax, rather the occupying tenant is, but council tax is liable by the landlord during periods where the property is unoccupied.
The tax you pay on your profits depends on whether firstly you are utilising your personal allowance fully from your full time employment, and if so, the taxation level will depend on what income tax band you are fall into. For example, the income tax rates for the 2019/2020 tax year, from 6 April 2019, in England and Wales are as follows:
Basic rate tax band (taxable income of 12,501 to £50,000) = 20%
Higher rate tax band (taxable income of £50,001 to £150,000) = 40%
Additional rate taxpayer (taxable income of over £150,000) = 45%
So for example, if you earn £15,000 from renting out your property in the current tax year, but you are already utilising your full personal allowance through full time employment, and you are a higher rate tax payer, your rental profits income will be taxed at 40%, and therefore your tax bill for the year will be £6,000 on the rental income.
The good news is that as an individual, you can claim allowable expenses on the profits of the rental income to help you reduce your tax bill.The allowable expenses as a landlord are:
Letting agent/management fees
Interest on the mortgage used to buy the property
Legal fees, usually for letting agreements, relevant for letting agreements less than one-year-old or for renewing a lease less than 50-years-old
House insurance (Contents insurance is usually the responsibility of the tenant)
General property repairs and maintenance
Water rates, council tax, gas and electricity that you may pay whilst the property is unoccupied
Rents (if you are sub-letting), ground rents, and service charges
Wages of hired help and other services
Household costs (e.g. phone calls, stationery, advertising expenses)
Vehicle running costs (you can claim the portion used solely for your rental business)
Accountant’s fees
The expenses that are not allowable against the profits of rental income, include:
Home improvement costs
Mortgage payments - as noted above, only the interest part of mortgage payment can be claimed
Copies of receipts for any expenses you claim should always be kept safely. Mirandus offer a free tax app which includes free access to Receipt Bank where you can digitally store all receipts on the cloud via a photo on your mobile device. Be aware that HMRC may ask for proof of any expenses at any time and up to six years after you claim them.
Trusts
The ownership of residential property by trustees, whether the trustees be a UK or non-UK resident, is a relatively straightforward process and mirrors very closely to the taxation rules of individuals in that the same expenses are allowed to be claimed against rental profits.
However, the taxation level for both UK and non-UK resident trustees are all subject to income tax at 45% on rental profit.
Trustees should also be aware of the potential availability of Principal Private Residence (PPR) relief and ensure that they have exercised their powers to permit the beneficiary to occupy the property.
Companies
If you decide to become a landlord full time and pool your profits under a limited company structure, the profits of the company are subject to corporation tax on rental profits of 19%, expected to reduce to 17% in 2020.
Deductions are also available for expenses incurred and there is no specific restriction on financing costs as applies to individuals and trusts, although a general interest restriction will apply if the net interest cost exceeds £2 million annually.
Under current rules, a non-UK resident company will be subject to income tax at 20% on its net rental profits. The position will change from April 2020, when non-resident companies will move into the corporation tax charge, which as noted above is expected to be 17%.
Non-UK resident landlords, whether regarded as an individual, a trustee or a company director, are subject to 20% withholding tax on rents received unless an application is made to HM Revenue & Customs (HMRC) under the 'non-resident landlord scheme' for rents to be paid gross.
The 20% withholding does not discharge the non-resident’s tax liability if they are subject to tax at 45%, rather it is used as a credit against their tax liability.
Inheritance tax implications on UK owned property
UK inheritance tax (IHT) applies to UK assets which are directly owned, regardless of the residence or domicile status of the owner. IHT is chargeable on death at 40% in relation to assets held at death.
IHT also applies to any gifts made within seven years prior to death, although there is a tapering of the IHT rate. Prior to 6 April 2017, owning UK residential property through a non-UK company provided an effective IHT shelter for individuals who were not deemed to be domiciled in the UK.
This is no longer effective from 6 April 2017 where a UK residential property is owned by a non-UK ‘close’ (ie not widely-held) company. Under these new rules, the value of the shares attributable to the UK residential property is within the scope of IHT.
Any loans made to purchase either UK residential property or any shares in a non-UK close company to the extent to which their value is attributable to a loan to purchase UK residential property, is also be within the scope of IHT.
Where residential properties are owned through a non-UK company post-5 April 2017, there are deeming provisions that give an ongoing IHT exposure for two years when the shares are eventually sold. This area is complex and specific advice should be sought.
Transfers of UK property into trust attract a 20% IHT charge and the UK assets will broadly be subject to a 6% IHT charge every 10 years, and a pro-rated 6% IHT charge on any distributions from the trust.
Where the settlor of the trust retains an interest in the trust, in addition to these charges the property will remain in their estate for IHT purposes.
Capital Gains implications: disposing of UK property
Gains on disposal of a residential property may be subject to capital gains tax (CGT). Any gains made on the sale of a property must be reported through self-assessment tax returns within 30 days of the sale taking place and there are penalties for late filing of self assessment tax returns.This 30 day filing and payment deadline that currently applies to non-UK tax residents will be extended to UK tax residents for disposals on or after 6 April 2020.
Individuals
Individuals are subject to CGT on gains realised on the disposal of residential property.
Individuals selling their only or main residence should qualify for PPR relief so that the gain is not chargeable. CGT on residential property is charged at 18% or 28%, depending on whether the individual has any basic rate band remaining (after the calculation of their income for income tax purposes).
Trustees
UK resident trustees are subject to CGT at 28% on gains realised on the disposal. Trustees may qualify for PPR relief where a beneficiary occupies a trustee-owned property under the terms of the settlement.
Company
A UK resident company is subject to corporation tax at 19% on gains realised on the disposal of residential property.From April 2019, all disposals of UK property by non-residents became subject to CGT, as will disposals of indirect interests in the property, for example, the sale of shares in a ‘property-rich’ company.
Gains on commercial property and indirect interests in all types of property will be rebased to April 2019, so that only the element of gain accruing from that date is taxable. Tax will be due at the same rate as an equivalent disposal by a UK resident. For example, a non-resident company disposing of a commercial property in June 2020 will pay tax on any gain at 17%.
Mirandus Accountants can help
In summary, the choice you make in the structure in which you hold property can have a significant impact on tax liabilities from the point of purchase through to the ultimate disposal of UK residential property. It pays to take the time to get the position right up front.
Mirandus Accountants are an accounting company in London and Edinburgh who are tax accountants for the self-employed and offer accountant services and tax advisory services for small business. You can contact us for a tailored solution to your unique business circumstances.
Whether you are an individual, freelancer, contractor or you run a small business, we can help to minimise your tax burden with our tax planning and tax advice services. That way, you can ensure you are only paying what you should be and nothing more.We strongly recommend you speak with a tax and accounting specialist like Mirandus Accountants, who can provide expert advice for your business and personal tax planning needs.
