20 December 2022
Addressing tax concerns are likely to be high up on many landlords’ new year’s resolutions lists. Here we share two of the top tips they should be considering for 2023:
Tip 1 - share ownership of the rental property with a spouse or civil partner
In many instances, rental properties are owned by just one individual in a married couple or civil partnership. Alternatively, the rental property may be owned jointly by a married couple or by civil partners and the standard position is that in these circumstances, HMRC will simply split the rental income equally.
If one member of the couple has a lower income than the other, it makes sense to explore whether the property income from the rental property can be assessed on them for tax purposes. This could mean that the rental income falls within a potentially unused income tax personal allowance or in lower income tax bands. It could also result in any mortgage payments benefiting from income tax relief in full.
There are however challenges to splitting ownership, and it is important to consider the property stamp tax implications in particular, as a cost could potentially arise. Such a cost may be worthwhile incurring if it is a long-term investment, due to the potential future income tax savings. It will also be important for married couples and civil partners to notify HMRC of any unequal split of rental income as it is necessary to notify them of this on a Form 17.
Tip 2 - think about the property business structure and whether incorporation is an option
For those landlords who have some substance to their rental businesses, it could make sense to explore whether their property businesses owned personally or in partnership should be transferred to a company structure instead.
There are significant tax advantages of such an incorporation. In particular, the company should benefit from tax relief in full for any mortgage or other related finance costs on the properties, whereas this could be restricted for the individual landlords.
In addition, properties standing at a capital gain could effectively see these gains deferred until a later disposal of the new property company’s shares if the transfer of properties qualifies for ‘incorporation relief’. If the conditions for this relief are met, then the properties themselves can effectively see their capital gains tax exposure mitigated on a future sale. However, it is vital that advice is sought before incorporating if a sale of the properties is intended as the relief can be denied in circumstances where the business is not transferred as a ‘going concern’.
The barrier to such planning is typically twofold. Often there is a commercial barrier with getting agreement with the lenders to transfer the properties and the other is a potential property stamp tax charge. Such a property tax cost may be minimised if the properties are owned in partnership, but these rules are commonly misunderstood, and it is often not as straightforward as some landlords think.
In many circumstances, there may well be a property stamp tax cost but even taking that into account, the benefits of an incorporation can outweigh this. This is particularly the case where inheritance tax in relation to the property portfolio is a concern as a company structure can provide more flexibility in transferring the value of the properties to wider family members or a family trust.
It’s been a tumultuous year for tax changes and landlords may find themselves once again in the crosshairs of tax rises and hit by interest rate raises. It’s never been more important for landlords to consider what steps they can take to plan ahead.