Absolutely right. We recently assisted one of our clients and many others in maximizing tax savings on rental properties. It’s not just about doing one thing; it’s about executing several strategies simultaneously, or at least the ones that are relevant to your situation.

As a property owner in the UK, you’re likely seeking ways to enhance the value of your investment. Have you considered exploring some tax-saving approaches? From the widely known Rent-a-room relief to lesser-known tactics like avoiding Capital Gains Tax by relocating overseas, there’s a range of strategies worth exploring.

In this essential article, we delve into the top 20 strategies for minimizing taxes associated with property ownership. We cover everything from optimizing deductible expenses to utilizing a Pension scheme for purchasing commercial property. Every strategy is valuable, and you wouldn’t want to miss out on any of them.

 

1. Rent-A-Room Relief

 

This initiative enables property owners or tenants to benefit from tax relief on the rental income earned by letting part of their home. Under this relief, you can receive up to £7,500 tax-free for the year. If a property is jointly owned, the relief is £3,750 for each owner, but there’s a twist! Interestingly, if three or more individuals collectively own a house they all live in, the limit remains £3,750 per individual and doesn’t get divided among the owners.

To qualify for this relief, certain conditions must be met:

• The home must be furnished.
• The letting must be residential.
• The owner(s) must occupy the property as their main home simultaneously with the lodger.

How Does this Relief Work?

When you utilize this relief, you are only taxed on the rental income exceeding £7,500 (£3,750 for joint ownership), which includes amounts received for additional services like meals, goods, cleaning, or laundry.

However, if you opt for rent-a-room relief, you cannot claim deductions against the expenses. Therefore, any losses incurred will not be deductible.

Illustration 1

Let’s consider an example: David rents out two rooms in his house at £150 per week each. After deducting £2,000 in related expenses, the net income from this letting is £13,600. Tax will be levied on this income. If David chooses Rent-a-room relief, his taxable income will be calculated differently:

 

It’s important to inform HMRC about opting for this relief within 12 months from January 31 following the end of the tax year. For instance, for the 2022/23 tax year, the election must be made by January 31, 2024.Particulars

Amount

Total rent (£150 x 52 weeks x 2 rooms) – 15,600

Less: Rent a room relief – 7,500

Taxable income – 8,100

Tips: Do not elect this relief if the rental income is less than £7,500 and your expenses are more than your rental income.

 

2. Sharing of Rental Income by Owning the Property Jointly

 

For a property jointly owned by a married couple, the rental profit is split equally by default. But if they wish, they can share rental profit in any proportion they like (so as to allocate more of rental income to the partner under lower tax rate).

In order to structure profit allocation this way, the couple need to change the beneficial ownership by filling out  HMRC-Form 17 where you can jointly elect to be taxed to your actual shares.

Significant income tax savings may result from transferring the property to your lower-earning spouse in part or whole. However, this tax strategy is only successful if your spouse actually receives the beneficial title to the property.

 

Tips: The problem arises when you want to transfer a share of the property’s income to your spouse but do not want to give a large share of the property. To resolve this, you can jointly own property under tenancy in common after taking advice from your solicitor. Then, transfer only an insubstantial share (say 1%) to your spouse, so you retain 99% ownership by preparing a formal property document (declaration of trust). Do not elect for the income to be split by the beneficial ownership percentage.

If you own property with your spouse, income will be by default split 50:50. Note that, form 17 should be filled only when you want a different proportion of income between two. Please note this is only applicable for the Spouse or Civil partners.

 

3. CGT Reduction on Jointly Owned Properties by Spouse/Civil Partner

 

In the 2020/21 to 2025/26 period, the standard capital gains tax-free allowance is £12,300 per individual. However, if a property is jointly owned by spouses or civil partners, the capital gains allowance increases to £24,600.

It’s important to note that, for capital gains tax (CGT) purposes, spouses are treated as a single entity. Consequently, if you transfer your property to your spouse or civil partner, no CGT is applicable.

 

Illustration 2:

Let’s consider Liam, who has realized a £55,000 gain from selling his investment property. With no other gains for the year, the CGT on this amount would be £42,700 after applying the annual exemption of £12,300.

However, if Liam jointly owns the investment property with his wife, Laura, the CGT on the gain would be reduced to £30,400 instead.

 

4. Using the Annual Exemption and transferring the Property in stages

 

You have the option to gradually transfer a residential property, which is not your main residence, to someone else in multiple stages, effectively using the annual exemption. However, it is crucial to seek advice from a qualified solicitor before proceeding with such arrangements.

 

Illustration 3:

Let’s consider Steve and Vanessa, who jointly own an investment property intended for their only son upon reaching 18. Acquired in 2012 for £55,000, they decided to transfer the property to him in 2022 when its market value was £115,000. This transfer qualifies as a gift, subjecting it to Capital Gains Tax (CGT).

The CGT is calculated based on the property’s fair market value at the time of the gift, resulting in a taxable gain of £70,000. Instead of an outright transfer, they could choose to transfer only 21% of the ownership in 2022, utilizing their joint annual allowance of £24,600.

Subsequently, they can continue transferring percentage ownership to their son in increments until the entire property is transferred tax-free, fully utilizing the joint annual allowance.

Note: Stamp Duty Land Tax (SDLT) is not applicable to property gifts as long as any existing mortgage against the property is not transferred or the mortgage amount is less than £125,000.

 

5. Private Residence Relief as CGT Avoidance Strategy

 

Private Residence Relief is a provision that can help reduce Capital Gains Tax (CGT) when selling a property. Essentially, it means that you won’t have to pay CGT on the profit from the sale of your residential property if it has been classified as your only or primary residence at some point.

Full Private Residence Relief is applicable if the property served as your only or main home throughout your ownership period. Additionally, relief is available on a proportional basis, considering the number of days the property was your main residence during your ownership.

Starting from the 2021/22 tax year, the last nine months of ownership qualify for relief, provided that the property was your main residence at some point.

Illustration 4:

Let’s look at Wayne’s scenario. He bought his first home in August 2009 for £65,000, lived there until May 2018, and then moved to a larger home. In July 2022, he sold his first property for £135,000.

Wayne’s initial property was his primary residence for 106 out of the total ownership period of 156 months. Consequently, the house is treated as Wayne’s principal private residence for 115 months (the 106 months he lived there plus the last nine months).

The relief under Private Residence Relief would be 115/156th of £70,000.

Tip: To benefit from the full Private Residence Relief, it’s advisable to sell the property within nine months of it being your primary residence, avoiding CGT on any gain.

 

6. Owning Properties Through a Limited Company

 

Investing in properties through a company has been a popular choice due to the comparatively lower corporate tax rate of 19%, as opposed to higher personal tax rates. However, a significant change is anticipated from April 2023.

Despite the apparent tax advantages of a company structure, the decision is not straightforward. There are cases where owning the property in an individual’s name may be more advantageous. It’s essential to carefully consider how you plan to withdraw funds from the company.

When it comes to compensation, you have two options: salary or dividends. Our linked article provides a more in-depth discussion on the pros and cons of investing in properties as an individual or through a company.

Tip: Opting for a salary may be more beneficial for someone without current income, as the salary becomes a deductible expense for the company, and the individual is exempt from income tax as long as it stays below the personal allowance.

If the employer needs to cover National Insurance (NI) contributions beyond the secondary threshold, it could be advantageous to pay that amount as a dividend. Similarly, if the individual has utilized their entire personal allowance, taking a dividend may be a more effective choice in that scenario as well.

7. Using a Property Management Company

 

When opting to invest in property personally, it’s possible to establish a company to benefit from lower corporate taxes while retaining ownership of the property.

The creation of a property management company serves as a representative for your property, typically incurring charges of approximately 10-15% of the gross rental income.

This approach proves advantageous for higher-rate taxpayers who can either leave the funds within the company or distribute dividends to individuals subject to basic-rate tax.

It’s important to be aware that operating a property management company involves additional compliance costs. The rental profit should be carefully evaluated to ensure that it remains viable after factoring in the extra expenses associated with running a limited company.

Tip: If you find it challenging to retain funds in the business or distribute dividends to individuals subject to basic-rate tax, and you are a higher-rate taxpayer in the current year, liquidating the company is an option. This allows you to claim business asset disposal relief and pay only 10% as Capital Gains Tax (CGT).

 

8. Making the Most of Your Rental Loss

 

Rental losses incurred from one property can be offset against profits generated by another rental property. However, it’s important to note that losses from the rental business cannot be used to offset against any other types of income.

Any surplus capital allowance, on the other hand, can be applied against alternative sources of income.

Illustration 5:

Consider Steve, who experiences an overall rental loss of £1,200 from his two buy-to-let properties, inclusive of a capital allowance of £800 for equipment purchased during the year.

In the same tax year, Steve earns £900 in interest income. The capital allowance can be utilized to offset against the interest income, resulting in a taxable income of £100. The remaining loss of £400 from the property business is carried forward to the subsequent tax year.

 

9. Avoid CGT on Gifting Holiday Homes

As of now, we understand that transferring a property to anyone other than a spouse or civil partner incurs Capital Gains Tax (CGT) based on the property’s market value at the time of the gift. However, if the property qualifies as a furnished holiday letting, there’s an opportunity to leverage holdover relief to avoid CGT payment when gifting the property.

Utilizing holdover relief necessitates signing a ‘gift relief election’ when transferring the property to someone other than a spouse or civil partner. With this relief, the capital gain is transferred to the recipient, and the property is considered sold at the cost price, exempting it from CGT.

If the recipient, such as your child, chooses to live in the property and designates it as their main residence throughout their ownership period, they won’t be liable for any CGT. This holds true for both the initial gift transaction and any subsequent property transactions.

Tip: It’s crucial to note that the application for holdover relief must be made within four years of the end of the tax year in which the gift is made. For instance, if you make a gift in July 2022, the deadline for applying for holdover relief is April 5, 2027.

 

10. Using a trust to avoid CGT

As mentioned earlier, mitigating Capital Gains Tax (CGT) on the gifting of a holiday home through proper tax planning is feasible. This strategy can be extended to include any property by transferring it into a specific type of trust.

The property can be gifted to a discretionary trust. Although the transfer is subject to CGT based on market value, you have the option to elect for gain holdover. This election exempts you from immediate CGT payment.

It’s important to note that any gain will only be assessed when the beneficiary (or beneficiaries) disposes of the property subsequently.

If you gift a property to a trust in which you hold some form of interest, you are ineligible to claim gift relief. The inclusion of minor children or a spouse as beneficiaries is considered having an interest in the trust.

Please be aware that transferring the property to the trust triggers Inheritance Tax liability for either the settlor or the trustee. However, utilizing the trust is particularly advantageous if the property’s value upon transfer is less than £325,000 (or £650,000 for jointly owned properties when both spouses are transferring the property into the discretionary trust).

 

11. Pay separately for fixtures and fittings to avoid SDLT

 

Stamp Duty Land Tax (SDLT) is a government-imposed tax on the acquisition of a chargeable interest in property. The buyer is responsible for paying SDLT based on the consideration paid for the acquisition.

The SDLT amount is reduced when the consideration is lower, but it raises the question of why a seller would agree to sell a property at a lower value.

To minimise SDLT when dealing with property transactions involving fixtures and fittings, an effective approach is to negotiate a separate payment for furnishings or fittings that are not subject to SDLT.

Illustration 7:

Let’s consider Frank, who intends to purchase a new property valued at £300,000 after selling his first home. However, Frank is required to pay SDLT on the entire amount at the time of purchase.

The SDLT amount Frank needs to pay is £5,000. The property’s cost is calculated by including furnishings or fittings worth £30,000.

By opting to make a separate payment for furnishings and showing it distinctly on the invoice, the SDLT is now reduced to £3,500. This results in a savings of £1,500 on SDLT for Frank.

Note: It is essential to ensure that you receive separate invoices for the property and furnishings when purchasing a furnished property. Furnishings, defined as moveable items, should not be included in the property’s value when calculating SDLT.

12. Inheritance Tax Planning by Giving Away the Property but Continuing to Live in it

 

Any gift you make, except for a chargeable lifetime transfer, becomes exempt from Inheritance Tax (IHT) if you survive for seven years after making the gift.

The Gift with Reservation of Benefit (GWROB) rules prevent a donor from giving away an asset while still enjoying some benefit from it. Under GWROB, the asset is treated as if it still forms part of the donor’s estate upon death.

Living in the property is permissible without it being considered part of your estate if you pay the market value of rent to the new owner, who becomes liable for the tax. However, there are opportunities for tax planning in this scenario.

Instead of gifting the entire property, you can opt to gift a portion of it. If the recipient, such as your child, resides in the house with you and shares the running costs, the gifted part will not be considered part of your estate if you survive seven years from the date of the gift.

Note: To qualify for the IHT benefit, it’s crucial to demonstrate that you have not received any undue benefit even after giving away the property. Establishing a joint bank account with your child to manage the property’s running costs is advisable. The costs should be appropriately divided between you and your child.

Please be aware that this arrangement ceases to apply if your child moves out of the property. In such a case, paying the market value of rent becomes necessary; otherwise, there would be a reservation of benefit.

13. Re-mortgage the Property to Avoid the CGT

 

This approach proves beneficial when the value of your investment property has significantly risen, and you aim to access some of the invested funds without incurring taxes.

The instinctive option might be to sell the property, but this entails paying Capital Gains Tax (CGT) on the transaction.

Instead of selling, an alternative strategy is to capitalize on the augmented fair value through property re-mortgaging.

Re-mortgaging involves securing a mortgage against a property that is already mortgaged.

Illustration 8:

Suppose you purchased a house for £250,000 with 80% financed by a mortgage, indicating ownership of 20%. Over the years, the property’s value has increased to £300,000, and you have paid £20,000 toward the mortgage. The outstanding mortgage is now £180,000.

By re-mortgaging the property for 70% of the current market value (£300,000), you pay off the original mortgage of £200,000, leaving you with £10,000 to allocate elsewhere. Simultaneously, your ownership in the property increases to 30%.

It’s important to note that CGT will be applicable when you eventually sell the property. The taxable gain is calculated as the difference between the original cost and the sale consideration, not the outstanding mortgage amount. Ensure your arrangement allows the property’s equity to cover the CGT liability.

Note: While having a higher percentage of ownership in the property may seem advantageous, it also means a larger mortgage and potentially higher repayments. A general guideline is that the maximum re-mortgage loan should be the original cost plus 70% of any increase in value.

 

14. Maximising Your Deductible Expenses

Capital expenditures are not eligible for deductions when calculating taxable property income. However, operational costs associated with the day-to-day management of your property investment business are not considered capital expenses and can be subtracted from your rental income.

Expenditures related to significant property enhancements are classified as capital and are not deductible.

Differentiating between repairs and improvements can be complex; while repair costs are tax-deductible, improvement costs are not.

Even though improvement costs cannot be deducted from rental income, they can be considered when calculating Capital Gains Tax (CGT) at the time of property transfer.

Note: Given that capital costs or improvement costs are typically one-time expenses, it may be more advantageous to stagger the payments over a period through a continuous improvement program. This approach is more likely to be recognised as a repair and, therefore, eligible for tax deductions. Additionally, it is advisable to request a fully itemised invoice from the vendor or contractor to easily identify allowable repair costs.

15. Using a Pension scheme to buy a Commercial Property.

 

A Self-Invested Personal Pension (SIPP) allows you to save and earn interest on a designated fund for your retirement. Similar to other pension schemes, a SIPP provides increased flexibility and control over investment choices, including the option to invest in commercial property.

One notable advantage of a pension scheme is the tax-free status of the income it generates. This can prove beneficial for financing the acquisition of your own commercial property through the pension fund, which can then be leased back to your company. Rental income from this arrangement is considered part of the pension scheme and is thus tax-free. Furthermore, if the property is later sold within the pension scheme, no Capital Gains Tax (CGT) is incurred on the gain.

A noteworthy aspect is the ability to claim rental expenses against the business income where the property is leased, resulting in a dual benefit. However, it’s important to note that SIPP management fees are relatively higher compared to other plans, necessitating a careful cost-benefit analysis.

In Illustration 9, David uses his pension contribution to acquire a new commercial property, leasing it to his business. The pension generates an annual tax-free rental income of £80,000.

Note: A SIPP scheme can borrow up to 50% of the scheme’s net fund value before any borrowing has taken place. Even if the property’s value decreases, the outstanding loan amount exceeding 50% does not constitute an unauthorized payment.

 

16. CGT offset of Property Gain Against Stock Market Loss

 

Capital gains tax (CGT) implications, especially when facing rates of 18% or 28% on the sale of residential property versus 10% or 20% on other capital assets, can be a concern for taxpayers.

CGT also applies to transactions involving shares traded in the stock market. One strategy to mitigate the impact is to offset any losses from selling shares against the gains made from selling your property.

Losses from the previous year can be utilised to offset gains in the current year, provided the loss has been reported in the tax return for the year in which the sale occurred.

Additionally, it’s worth noting that you can claim a loss on shares even if you haven’t sold them. However, HMRC must acknowledge that the quoted shares have effectively become worthless for the claim to be valid.

To determine if your shares are on the HMRC’s negligible value list, you can check the provided resources. If listed, you have the option to treat the shares as though they were sold either on the date of the claim or up to two years before the tax year in which the claim is made.

Note: It is advisable to delay the CGT loss claim until the capital gain surpasses the annual exemption limit.

 

17. VAT Planning for Property Investors

 

Commercial letting is not subject to VAT.

However, the exemption on land and building supplies creates a challenge due to the inability to recover the substantial input tax incurred during the purchase.

The option to tax provides businesses with the ability to introduce VAT on transactions that were previously exempt.

This option empowers the trader to choose to convert the exempt supply into a standard taxable supply, enabling the recovery of related input tax in full.

It’s important to note that the option to tax is applied on a building-to-building basis. Consequently, an owner can opt to tax one building while choosing not to do so for another property.

Illustration 9:

Consider Alex, the owner of a commercial property. He leases the ground floor to an accountancy firm and the first floor to an insurance company, incurring £500,000 for the building’s renovation, including VAT.

To reclaim the £100,000 input VAT paid for the renovation, Alex can opt for tax on his supply.

Upon opting for the ‘Option to tax’, Alex must issue invoices to the accountancy firm and insurance company for rent plus VAT.

However, as the first floor is leased to an insurance company, the input tax paid by the company against rental expenses becomes non-recoverable, given that the outward supply by the insurance company is exempt.

 

18. Utilising Capital Allowance

 

For commercial properties, including furnished holiday accommodation, you have the opportunity to claim capital allowances on the purchase of specific qualifying assets exclusively used for business purposes against rental income.

Both companies and sole proprietors are eligible to claim this allowance.

The availability of capital allowances is not restricted to the time of asset acquisition. In most cases, it is possible to retroactively claim missed allowances, provided the qualifying asset is currently in use.

In the context of a property business, furniture and fixtures are the primary qualifying assets eligible for capital allowances.

Apart from furniture and fittings, other eligible expenditures for capital allowances in commercial property transactions include plant and machinery, such as heating and cooling systems, emergency lighting, security systems, and similar assets.

 

19. Cost of Replacing Domestic Items

 

If you engage in residential letting, you have the opportunity to claim a deduction for the expenses incurred in replacing domestic items.

Examples of domestic items include movable furniture, furnishings, household appliances, and kitchenware.

While capital allowances on furniture are generally not available for residential properties, you can still claim relief when replacing furniture (a domestic item) in your residential property.

To be eligible for relief:

 

• You must conduct a property business that involves letting dwelling-houses.
• The old domestic item, provided for use in the dwelling-house, should be replaced with a new domestic item, ensuring that:
  1. The new item is exclusively provided for the lessee’s use in that dwelling-house.
  2. The old item is no longer available for use by the lessee.
• The expenditure on the new item must comply with the wholly and exclusive rule and would otherwise be restricted by the capital expenditure rule.
• Capital allowances must not have been previously claimed for the expenditure on the new domestic item

 

20. CGT Avoidance by Moving Overseas

 

If you sold a commercial property that you owned when you lived in the UK prior to 6 April 2019, then you will not be liable to UK CGT as long as you stay non resident for five full tax year.

However, if you sold your property before 6 April 2019 while you were non-resident, but you returned to the UK within five years, you will have to pay CGT on sale of the property in the tax year you return.