Private
Landlord
The vast majority of UK properties are privately owned by individuals,
many having been purchased as an investment rather than as a main residence.
The private investor landlord is taxed on the amount of
letting income received less allowable expenses incurred on a fiscal year
basis, as well as on any capital gain that may be made on the sale. Inheritance
tax may be payable on the value of the property held at the date of death.
Stamp duty land tax (Land and Buildings Transaction Tax in Scotland, Land
Transaction Tax in Wales) may be payable on the purchase of the property.
Individuals who purchase property jointly, intending to rent
for the long term, are taxed on their share of the annual rental profits made
or gains made on the sale. Joint owners of property purchased with the
intention to sell after restoration are likely to be in a ‘trading partnership’
with each being taxed as a self-employed ‘property dealer’. For a ‘trading’ partnership
to exist, there needs to be a degree of organisation with a view to making a
profit (similar to that required for an ordinary commercial business). A
partnership agreement is, therefore, recommended.
If the landlord has no other income, the annual personal allowance
is deducted from any profit made on the letting income in full. If he or she
has other income, the personal allowance may not be available and, as such, the
profits made will be taxed at the landlord’s marginal rate of tax.
A ‘Property Allowance’ is available, the claiming of which removes
the liability to tax should gross rental income be less than £1,000 (see Tip
31). This allowance is particularly useful should the gross income less the
allowance be lower than the income minus expenses, producing a lower profit.
Depending upon the level of letting profit, being a sole
investor would normally be expensive in comparison with joint investor ownership.
A sole investor will be taxed in full at his or her marginal rate of tax
whereas, with joint investor ownership, the letting profit is split with each
owner’s share of profit being taxed at his or her respective marginal rate.
Therefore, should a property be jointly owned 50:50 and one taxpayer be a basic
rate taxpayer and the other a higher or additional rate taxpayer, the total tax
bill will be reduced by 50% of the difference between the tax due at the higher
and lower rates as compared with the tax that would be payable were the income
received solely by the higher or additional rate taxpayer. If the taxpayer was a
basic rate taxpayer and the property was put in joint names where one partner
was a higher rate or additional rate taxpayer then the tax bill will increase.
Further tax reduction is possible should one investor be a non-taxpayer,
as the full amount of that individual’s personal allowance will be available
for offset.
The example shows the tax position should one owner be taxed
at a higher rate than the other.
Private
Landlord
Joanne and Robert are married and own a portfolio of rental properties
50:50.
For the year 2019/20, each has other income such that Joanne
is a 20% basic rate taxpayer, but Robert is a 45% additional rate taxpayer.
Total net rental profit is £825 per month, i.e. £9,900 per
year = £4,950 each.
Joanne: Tax liability of £990 (£4,950 @ 20%).
Robert: Tax liability of £2,227.50 (£4,950 @ 45%).
If Robert owned the properties as a sole investor, the tax liability
would be £4,455; by owning the properties jointly with Joanne, there is a tax
saving of £1,237.50. This saving could be doubled should the property be solely
in Joanne’s name and the profit does not take her into the higher rate tax band.
This tip is from our brand new book 101 Property Tax Tips.
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