How to make money from a rental property

jacobs allen tax planning

Interest rates on buy-to-let mortgages are falling, rental incomes are rising and the demand for homes outside of London is growing, meaning now could be the time to invest in property.

The great shift from the city to the suburbs means rentals in Suffolk and the surrounding areas are in greater demand than they were pre-pandemic and as a result, rents have risen by as much as 6% in some areas. Meanwhile, there has been a surge in demand for holiday lets especially in Suffolk and Norfolk.

While landlords are able to charge more, and their properties are in greater demand, they are also paying less interest on any loans.

In the three months to May 31 this year, the average interest rate on buy-to-let mortgages dropped with a 0.1% saving on a two-year fixed-rate and a 0.11% reduction in the average rate for a five-year fixed.

Savings are not restricted to fixed-rate options, and in April there were 2,333 buy-to-let mortgages being offered by lenders, the highest number since before the pandemic.

However, over the past five years the Government has made it less attractive to own multiple properties with fewer tax breaks for those expanding their property portfolios.

Our experts at Jacobs Allen are here to guide you through the process and ensure you can make the most of the benefits that are available, maximising the return on your investment.

Here we offer a guide to the main taxes you will be liable for.

Stamp duty land tax taper

The stamp duty holiday introduced last year to offer a temporary £500,000 tax-free threshold no longer applies, but no stamp duty will be paid on the first £250,000 of residential purchases in England and Northern Ireland until September 2021.

As a landlord or second-home buy you can benefit from this, however you will still be liable for a 3% surcharge on the total purchase price.

To qualify, the deal must be completed before the end of September so anyone in the process of buying a property now should ensure everything is dealt with before then.

Tax liabilities on rental income

Much has changed recently in terms of the tax due on any rental income you earn from a property so even established landlords should read on.

Rental income – including rent, non-refundable deposits and any refundable deposit you retain – is subject to income tax. It is added on to any other taxable income and taxed at the relevant rate.

Everyone has a personal allowance of £12,570 in 2021/22, while there is an additional £1,000 property allowance where the gross income from property is below £1,000.

Rental income which does not see you exceed these limits is not taxable, assuming you have no other source of taxable income, but you might still need to make a declaration.

After this, your profits will reduce as tax is applied at increasing levels.

If you are married, as with other assets, it can be worth exploring holding properties in your spouse’s name if they are in a lower income tax bracket to you or in joint names or partnership.

Income tax deductions

You can deduct certain costs from your rental income associated with your day-to-day expenses.

These include a range of expenditure from letting agent’s and accountant’s fees, to property maintenance and repair, although anything that improves the property or upgrades it are not deductible.

The big change in recent years concerns the rules for buy-to-let mortgage repayments. Prior to 2017, the interest component of these and other financing costs were classed as a deductible expense, often representing a significant saving on income tax.

However, this benefit has gradually been phased out and since 2020 mortgage interest payments are no longer deductible. You can, however, claim a 20% tax relief on your interest payments and those financing costs, subject to certain limits.

This means there is little impact for standard rate tax payers but for higher rate tax payers this could change the dynamic and prevent you from making a profit from property.

It is worth remembering that even if your regular earnings are below the higher rate threshold, income from property could push you into the next bracket.

Property companies

One potential mitigation is to hold your investments in a limited company. Many people do this. Then, rental income is taxed like any business income, with loan interest a deductible expense, currently at a corporation tax rate of 19%. However, there are several knock-on effects.

For example, in addition to the company paying corporation tax, you will probably face personal tax liabilities when withdrawing the money from the company.

It is very important to go into such an arrangement fully aware of the implications. We can help you understand the pros and cons.

Capital gains tax considerations

This is applied when you come to sell the property if it has increased in value.

Capital gains tax is paid at 18% of the gain for basic-rate tax payers, and 28% for higher and additional rate tax payers.

Your primary residence is generally exempt from capital gains tax but this is not the same for additional properties.

It is important to emphasise that capital gains tax is only paid on the profit made on an asset, not the sale price.

You can deduct certain costs; offset some losses on other assets from other years against gains; and everyone has an annual capital gains tax exemption which currently protects the first £12,300 of gains made.

If the property is co-owned by spouses the limits can be combined to offer a maximum £24,600 tax free allowance.

Letting relief could also help reduce the tax owed on disposal of the asset but only if you lived in the property, it is not available to buy-to-let landlords who never reside there.

Various factors go into working out letting relief, and overall it is capped at £40,000, or £80,000 for married couples.

Holiday lets

If you are interested in taking advantage of low interest rates to buy a holiday home, these come with their own unique tax rules which can be advantageous.

Strict criteria must be met for a property to qualify as a holiday let, though. These are to do with how often it is made available for letting in the year, who stays in it, and its occupancy rate.

If these are met, there are a range of capital gains and income tax allowances that become available.

Call us for a personalised review of the tax impact and business issues for your potential investment


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