Category: Tax Relief

Tax Benefits of Incorporating Your Property Portfolio

Many UK landlords are exploring the idea of holding their buy-to-let properties in a limited company structure. This trend has accelerated in recent years as tax reforms have made traditional personal ownership less profitable for higher-rate taxpayers. By incorporating a property portfolio, investors can potentially reduce their tax bills, take advantage of business tax treatment, and plan more effectively for the future. Below, we outline the key tax advantages of operating through a limited company – from lower tax rates on rental profits to full mortgage interest relief, inheritance tax planning, and deferring personal taxes. We also highlight some important drawbacks (like added costs and Stamp Duty) that need to be weighed in any decision.

Lower Corporation Tax on Rental Profits

One of the main reasons landlords incorporate is to pay Corporation Tax on rental profits instead of Income Tax. Rental income received by an individual is added to their other income and taxed at their marginal income tax rate (which for higher earners is 40% or even 45%). In contrast, profits in a company are subject to Corporation Tax – currently 19% for small profits, up to 25% for larger profits (as of April 2023). Even at the new 25% rate, this can be significantly lower than personal tax rates for many landlords. For example, a higher-rate taxpayer with £20,000 of annual rental profit would face around £8,000 of Income Tax, whereas a company paying the small profits rate might owe just ~£3,800 in Corporation Tax – leaving much more after-tax profit to reinvest. Put simply, paying 19–25% Corporation Tax instead of 40–45% Income Tax can dramatically lessen a landlord’s tax bill. This is especially beneficial if you’re already in a high tax bracket or if the rental profits push you into one.

It’s important to note that the tax advantage exists at the company level. If you want to draw the profits out for personal use, you’ll then pay personal tax (for example, dividend tax) on those withdrawals. We’ll discuss this more under “retained profits,” but the key idea is that keeping profits inside the company is taxed more lightly up front than taking them personally. In summary, operating via a company converts rental income into corporate profits, taxable at generally lower rates than personal income – a fundamental tax saving for many property investors.

Full Mortgage Interest Deductibility

Another major driver for incorporation is the mortgage interest relief treatment. In recent years, individual landlords have lost the ability to fully deduct mortgage interest from their rental income. Under Section 24 rules (phased in from 2017), individual buy-to-let owners can only claim a basic-rate tax credit (20%) on their finance interest, rather than deducting it as an expense. This means higher-rate taxpayers effectively pay tax on part of their mortgage interest, significantly increasing their tax bills on geared properties. For example, an individual landlord paying £10,000 in mortgage interest annually only gets a £2,000 tax credit now, even if they are in the 40% tax band (whereas prior to Section 24 they would have deducted the £10k and saved £4,000 in tax). This change has turned many geared portfolios barely profitable or even loss-making on a post-tax basis for higher-rate landlords.

Limited companies are not subject to Section 24. When you hold property in a company, the mortgage interest is treated as a business expense – it can be deducted in full against rental income before calculating taxable profit. The company’s tax bill is thus based on net profit after interest, just like any other business. All the interest costs provide tax relief at the Corporation Tax rate. In practice, this restores the old tax treatment: the full mortgage interest offset can result in substantial tax savings for highly leveraged investors. For instance, if your rental property earns £15,000 in rent and has £10,000 in mortgage interest, an individual higher-rate landlord would still be taxed on the full £15,000 (with only a £2k credit), whereas a company landlord is taxed only on the £5,000 net profit – a far smaller taxable base.

This difference is a key reason 69% of landlords plan to buy new rental properties via limited companies. By using a company, landlords can maintain interest as a deductible expense and avoid the punitive effective tax rates that Section 24 created for personally owned properties. In short, incorporation can preserve interest relief and keep your financing costs fully tax-deductible – critical for those with mortgages on their rentals.

Inheritance Tax Planning via Company Structures

Using a company can also open up inheritance tax (IHT) planning opportunities for landlords who want to pass their property wealth to the next generation. If you own properties personally, it can be complicated and costly (in terms of IHT and Capital Gains Tax) to transfer bits of property to your children or other heirs during your lifetime. However, with a company, you have much more flexibility in transferring ownership gradually by way of shares. You can bring family members in as shareholders or directors, and gift or sell shares in the company over time, rather than having to slice up the property titles themselves. Small transfers of shares can potentially be done within annual gift allowances or via trust planning, helping to reduce the taxable value of your estate bit by bit.

More sophisticated planning is also possible. Many advisers use Family Investment Companies with special share classes (sometimes called “freezer shares”) to control how future growth in the company is allocated between generations. For example, parents can retain a class of shares that hold the current value of the portfolio, and issue a new class of shares to their children that will accrue all future growth in value. This effectively “freezes” the parents’ estate at today’s value for IHT purposes, while any appreciation in the property portfolio from this point forward happens in the children’s shares. As a result, if the properties continue to grow in value, that growth can bypass the parents’ estate (and thus avoid inheritance tax) and belong to the next generation. Crucially, when set up correctly, this does not trigger immediate tax – the new shares have only nominal value initially, so parents aren’t making a taxable transfer of substantial value at the time of structuring.

It should be noted that standard buy-to-let companies are usually considered investment companies for tax purposes, which currently do not qualify for Business Property Relief (BPR) – a relief that can make certain business assets IHT-free after two years. (BPR is generally available for trading businesses, not passive investment portfolios.) However, with careful planning, some landlords restructure activities to become more active property businesses (e.g. development or holiday lets) or use the share structuring techniques mentioned above to mitigate IHT. In any case, holding properties in a company gives greater flexibility to plan for inheritance, allowing strategies like gifting shares, issuing growth shares, or using trusts. This can substantially reduce the inheritance tax eventually due on the portfolio, compared to simply holding properties until death and leaving them in a will with a 40% IHT exposure. Given that property values often far exceed the IHT nil-rate bands, this kind of planning can save heirs a significant tax bill in the long run.

Retaining Profits and Deferring Personal Tax

A less immediate but powerful benefit of a company structure is the ability to retain profits within the company, deferring any personal tax liability. If you own properties personally, any profit (after expenses) is yours – which also means it gets taxed as part of your personal income each year. But within a company, you have a choice: you can pay out profits to yourself (as salary or dividends) or you can simply leave the profits in the company to reinvest or pay down debt. The profits that are retained in the company only suffer Corporation Tax in that year. No further tax is due until you decide to extract the money for personal use. This creates a valuable tax-deferral advantage.

For example, suppose your property company makes £50,000 in profit this year. The company will pay, say, 19% Corporation Tax (if within the small profits limit), leaving about £40,500 after tax. If you don’t need that money personally right away, you can reinvest the £40k into buying another property or improving existing ones. No personal tax is triggered because you haven’t taken a dividend or salary from those profits. In contrast, if you owned the portfolio personally and earned £50,000 net profit, you’d pay income tax on it in the same tax year – possibly £20,000 (40%) if you’re a higher-rate taxpayer – leaving you only £30k to reinvest. Over time, this ability to reinvest a larger portion of your earnings (since only the lower corporate tax is taken out) can accelerate the growth of your portfolio.

Another way to view this is that a company lets you time your personal tax events for when it’s most efficient. You might choose to take dividends in years when your other income is low, or spread dividends over time to stay in lower tax bands. Or you might retain profits until retirement, using them to fund a future income when you stop other work. There is also the possibility of extracting some profit as a modest salary (which can be set to use your personal allowance tax-free) and some as dividends, achieving a tax-efficient mix. The key point is flexibility – a company gives you much more control over when and how you take income, allowing you to defer or minimize personal taxes in a way an individual landlord cannot.

Of course, whenever you do draw the profits out, you’ll pay personal tax at that point (dividend taxes, which are currently 8.5% basic rate, 33.75% upper rate, etc., after a small allowance). This means incorporation isn’t about avoiding personal tax altogether, but about delaying it and potentially reducing it. For many investors, the strategy is to use retained earnings for growth and only take out what they need when they need it – thereby maximising the funds kept in the low-tax company environment. This can be especially useful if your goal is to build a larger portfolio for the long term, or if you already have other income and don’t require the rental profits immediately.

Potential Drawbacks of Incorporating

Incorporating a property portfolio isn’t a one-way ticket to tax savings; it comes with its own costs and complications. It’s crucial to weigh these drawbacks against the benefits discussed above. Here are some key considerations to keep in mind before you rush to set up a property company:

  • Upfront Transfer Costs (Stamp Duty and CGT): If you are moving existing properties from personal ownership into a new company, it isn’t as simple as “re-registering” them – you typically have to “sell” the properties to your company at market value. This can trigger Stamp Duty Land Tax (SDLT) on the transfer, as well as potential Capital Gains Tax (CGT) on any increase in value of the properties. The company will pay SDLT just like any buyer (including the 5% additional rate), and you, as the seller, could face CGT on the gain (18% or 28% for residential property, depending on your tax band). There are some reliefs available – for instance, Incorporation Relief under certain conditions – but many landlords find that incorporating an existing portfolio can come with a hefty upfront tax bill. It’s essential to calculate these costs to see if the long-term tax savings justify the immediate hit.
  • Ongoing Compliance and Administration: Running a limited company means more paperwork and expense. You’ll need to file annual accounts and confirmation statements at Companies House, submit Corporation Tax returns to HMRC, keep proper company books, and likely pay an accountant to ensure all this is done correctly. If you pay yourself a salary or take dividends, there are additional reporting requirements (PAYE payroll filings, dividend documentation, etc.). In short, the administrative burden is higher than just declaring rental income on a personal Self-Assessment. These compliance costs will eat into the financial benefits of incorporation. Landlords should factor in accountancy fees and the value of their time. For a single property or small portfolio, the savings may not outweigh these extra costs – incorporation tends to make more sense as the portfolio (and the tax saving) grows larger.
  • Double Tax when Extracting Profits: As discussed, while profits inside the company are taxed at a lower rate, when you take money out for personal use you’ll face personal tax. Typically this is via dividends (since most buy-to-let company owners don’t put themselves on a large salary). Dividend tax rates are lower than income tax rates, but they still apply. For example, after the first £500 of dividends (2024–25 allowance), a basic-rate taxpayer pays 8.5% and a higher-rate taxpayer 33.75%. This second layer of tax can reduce the overall advantage, especially if you withdraw most of the profits each year. In a scenario where a landlord wants to live off the rental income fully, the combined Corporation Tax + Dividend Tax might not be much better than simply paying Income Tax personally. The benefit is greatest when you reinvest or hold profits in the company. If you need all the cash out, the benefit shrinks (though you could still gain some advantage up to the basic-rate band, etc.). It’s important to plan distributions carefully. In other words, the “tax deferral” only helps if you actually defer taking the income; otherwise, you end up with two layers of tax. (On the plus side, if you plan to eventually sell the company or its properties, having paid down debt with retained profits, you might take profits via a capital route or at a time when tax rates are different. It adds strategic options, but requires foresight.)
  • Mortgage Availability and Costs: Many landlords don’t realize that getting a mortgage through a company can be a bit more involved. Fewer lenders cater to limited company buy-to-lets (often these are considered Special Purpose Vehicles (SPVs)), and interest rates can be slightly higher to account for perceived additional risk. Lenders will almost always require personal guarantees from the directors/shareholders for small property companies, effectively tying your personal liability to the debt anyway. You might also find arrangement fees higher or loan-to-value ratios slightly lower. This isn’t a tax issue per se, but it does affect the overall profitability of the investment. It’s worth checking with mortgage brokers what rates/terms your company could get versus personal mortgages. With interest rates currently higher than they’ve been in recent years, even a small rate difference can outweigh some tax savings. Always factor in financing costs under a company structure.
  • Loss of Personal Allowances/Reliefs: Holding property in a company means you personally no longer get certain perks. For instance, individuals each have a Capital Gains Tax annual exemption (£3,000 for 2024–25) that can be used against property sales – companies do not get this; every pound of gain is taxed. Likewise, if you have any personal rental losses carried forward, those can’t be used by the company. A company also doesn’t benefit from your personal tax-free allowance (though you could use that via a salary). These trade-offs are usually minor compared to the big-ticket items above, but they are part of the picture. If you anticipate selling properties, remember a company’s sale profits are taxed at Corporation Tax rates (which could be higher than the 18% basic-rate CGT for individuals, for example).

In summary, incorporation has pros and cons. The tax benefits – lower tax on profits, full interest deductibility, potential IHT advantages, and flexibility of profit withdrawal – need to be balanced against the costs and practicalities – immediate taxes on transferring in, ongoing administrative costs, double taxation on extraction, and financing considerations. For some landlords (especially higher-rate taxpayers with multiple properties they plan to hold long-term), the scales tilt in favor of incorporation. For others (small-scale or basic-rate landlords, or those planning to sell in the short term), staying as an individual may be simpler and more cost-effective.

Conclusion

Choosing whether to hold your property investments through a limited company is a significant decision that should be evaluated case by case. This structured approach can offer substantial tax savings and planning flexibility for the right investor profile – particularly those looking to grow portfolios and pass on wealth efficiently. We’ve seen that lower corporate tax rates, unrestricted mortgage interest relief, and the ability to reinvest profits can make a compelling case for incorporation. Real-world scenarios bear this out: it’s no coincidence that the number of buy-to-let companies has surged fourfold since mortgage interest relief was curtailed for individuals. However, incorporation is not a one-size-fits-all solution. The compliance responsibilities, upfront costs (SDLT/CGT), and the need for careful profit extraction planning mean that professional advice is essential.

Often forming a company for new acquisitions (while leaving existing properties as they are) can be the best option.

Ultimately, operating via a limited company is a powerful tool in the landlord’s tax planning arsenal, but like any tool, it must be used in the right circumstances. By understanding the tax benefits – and the pitfalls – outlined above, property investors can make an informed choice about whether incorporation is the best route for their portfolio. As always, consult us first before making any decisions we can tailor the advice to your specific situation and help navigate the process if you decide to proceed. With the proper planning, incorporating your property business can be a savvy move that pays dividends (quite literally) in the years ahead.

The top tax-effective benefits for directors and employees

Offering benefits-in-kind to your staff is a great way to make your business an attractive place to work. And these benefits add even more value if they’re also either tax-effective or tax-free.

You can offer certain concessions that make benefits provided to your employees (including directors) either low-tax or no tax. To be clear, we’re talking here about general employee benefits, not higher-value items such as company cars or share options etc.

Under certain circumstances, these general benefits-in-kind (BiK) become taxable if they’re provided as part of a flexible salary sacrifice system. But let’s look at the kinds of benefits you can offer – and the avantages they have for your employees.

The top tax-effective benefits to offer your team

If you want to offer employee benefits, but don’t want these BiK to end up attracting significant tax penalties for the employee, there are several useful benefits to consider.

For example:

  • Gifts of £50 or under – gifts not exceeding £50 can be given to employees without any tax or National Insurance charges arising. The cost is tax-deductible by the company. The gift must not be related to any work achievements, must not be money, must not be a contractual entitlement and, for directors, the total must not exceed £300 per annum.
  • Annual staff functions – annual functions, such as the yearly Christmas party or team summer barbecue, can be given to employees, provided the total cost per person during the year doesn’t exceed £150 per guest, including VAT.
  • Work mobile phones – a single mobile telephone can be provided to each employee together with the associated line rental and call charges, with no personal tax charge for any private use.
  • Free staff meals – free meals can be provided on company premises or in a staff canteen, provided that it’s on a reasonable scale.
  • Employer pension scheme contributions – as an employer, you can contribute (sometimes, have to contribute) to employee pension funds, within certain annual and lifetime limits. Topping up your employee’s contributions helps to increase the overall benefit of the mandatory work pension scheme.
  • Life insurance cover – Death in Service cover can be provided for your employees, and will normally be tax free, both the insurance premiums paid and any claims paid.
  • Health and medical check-ups – one health-screening assessment and one medical checkup per annum can be provided to each employee. This doesn’t cover full medical insurance, and also doesn’t generally cover medical treatment.
  • Welfare counselling – counselling can be provided to your employees free of tax, but this doesn’t cover medical treatment, legal, tax or financial advice. However, debt counselling is covered.
  • Business mileage – where your employee uses their own car for business travel, that business mileage can be reimbursed at a rate of £0.45/mile for the first 10,000 miles in a tax year and £0.25/mile thereafter.
  • Home-working allowance – you can pay an allowance of £6/week (£26/month) to employees who are required to work from home.
  • Private gyms – gym facilities can be provided to your employees and their family members, as long as the gym premises are not available to the general public.
  • Staff suggestions – rewards for making innovative business suggestions can be paid free of tax, as long as the amount doesn’t exceed £25. If an employee’s suggestion is implemented, a further award, linked to a proportion of the financial benefit to the company, can be made, subject to a cap of £5,000.
  • Long-service awards – you can offer a long-service award to a member of staff after a minimum of 20 years’ service. There must be at least ten years between awards that are made and the award has to be articles rather than cash. The overall cost can’t exceed £50 per year of service.

You can find out more details on the many available employee benefits-in-kind on the Expenses and benefits: A-Z page on the HMRC site.

If you provide a range of attractive tax-effective benefits to your employees, this goes a long way to creating a more satisfied, happy and productive workforce.

Many of the rules around employee benefits are complex and difficult to calculate, so it’s well worth talking to us about your benefits plans and where we can offer advice. We can walk you through the available options and show you the tax implications for your team.

steve@bicknells.net

Have you remortgaged? will that restrict the recovery of interest beyond the Section 24 rules?

Many Buy To Let properties were purchased in individual names, that was norm before, then from 2017/18 we saw the introduction of clause 24 (section 24).

Essentially Section 24 removes Interest from the property expenses and gives you tax relief (finance allowance) at 20% (basic rate). So Higher rate tax payers will pay more tax.

Historically, its been common for BTL owners to regularly remortgage and with draw capital, basically cashing in on house price rises.

But what many owners seem to have overlooked is that if the mortgage exceeds the original property value (including SDLT and related costs) plus any improvement costs, then the mortgage interest is further restricted.

Increasing a mortgage

If you increase your mortgage loan on your buy-to-let property you may be able to treat interest on the additional loan as a revenue expense, as long as the additional loan is wholly and exclusively for the purposes of the letting business.

Interest on any additional borrowing above the capital value of the property when it was brought into your letting business is not tax deductible.

If the mortgage is for a residential property then the restrictions on interest from April 2017 will apply.

Examples of how to work out Income Tax when you rent out a property – GOV.UK (www.gov.uk)

steve@bicknells.net

Are you missing out on Qualifying Interest Relief?

If you pay interest on a personal loan then you used to lend money to your limited company then you can probably claim tax relief on the interest that you pay on your personal loan.

Here are the rules from HS340 – You may be able to claim relief for interest paid or for alternative finance payments where the loan or alternative finance arrangement is used to:

  • buy ordinary shares in, or lend money to, a close company in which you own more than 5% of the ordinary share capital on your own or with associates
  • buy ordinary shares in, or lend money to, a close company in which you own any part of the share capital and work for the greater part of your time in the management and conduct of the company’s business, or that of an associated company
  • acquire ordinary share capital in an employee controlled company if you are a full-time employee – we regard you as a full-time employee if you work for the greater part of your time as a director or employee of the company or of a subsidiary in which the company has an interest of 51% or more
  • acquire a share or shares in, or to lend money to, a co-operative which is used wholly and exclusively for the purposes of its business
  • acquire an interest in a trading or professional partnership (including a limited liability partnership constituted under the Limited Liability Partnership Act 2000, other than an investment limited liability partnership)
  • to provide a partnership, including an limited liability partnership, with funds by way of capital or premium or in advancing money, where the money contributed or advanced is used wholly for the partnership’s business – if the partnership is a property letting partnership, read information about the residential property finance costs restriction
  • buy equipment or machinery for use in your work for your employer, or by a partnership (unless you’ve already deducted the interest as a business expense) – relief is only available if you, or the partnership, were entitled to claim capital allowances on the item(s) in question – if the equipment or machinery was used only partly for your employment, or only partly for the partnership business, only the business proportion of the loan interest or alternative finance payments qualifies for relief)

You cannot claim relief for interest on overdrafts or credit cards.

The limit on Income Tax reliefs restricts the total amount of qualifying loan interest relief and certain other reliefs in each year to the greater of £50,000 and 25% of ‘adjusted total income’.

To claim the tax relief you enter the amount of interest paid on your self assessment return under Additional Information SA101 ‘Qualifying Loan Interest Paid in the Year’.

This could be useful for Property Investors who invest via a limited company. Here is an example

Fred Smith owns his own home worth £500k without a mortgage

He borrows 75% £375k against his home and lends it to his limited company, the interest rate from his broker is 2% cheaper than borrowing in his limited company.

So he could save £7,500 a year interest

He also gets tax relief on the interest that he has paid.

steve@bicknells.net

If you don’t charge a market property rent what expenses can you claim?

There may be times when a property owner decides not to charge a market rent or lets the property rent free. This will mean you will be restricted on the amount of expenses you can claim.

PIM2130 Properties not let at a commercial rent

Expenses incurred by a customer on a property occupied rent free by, for example, a relative are likely to be incurred for personal or philanthropic purposes – to provide that person with a home. The same applies where the property is let at less than a commercial rate or isn’t let on commercial terms.

Unless the landlord charges a full market rent for a property (and imposes normal market lease conditions) it is unlikely that the expenses of the property are incurred wholly and exclusively for business purposes (PIM2010). So, strictly, they can’t be deducted in arriving at rental business profits. However, if the customer lets a property below the market rate (as opposed to providing it rent-free), they can deduct the expenses of that property up to the rent they get from it. This means that the uncommercially let property produces neither a profit nor a loss, but the excess expenses cannot be carried forward to be used in a later year.

A relative or friend may ‘house sit’ between normal lettings on commercial terms. Provided the property is genuinely available for commercial letting and the landlord is actively seeking tenants they can deduct the expenditure incurred on that property in the normal way. 

PIM2010 – Property Income Manual – HMRC internal manual – GOV.UK (www.gov.uk) states

Wholly and exclusively rule                        

Most of the trading expenses rules are applied to property income (see PIM1100 onwards). This includes the ‘wholly and exclusively’ rule which says that expenses cannot be deducted unless they are incurred wholly and exclusively for business purposes.

Dual purpose expenditure

Strictly, if an expense is not wholly and exclusively for the purposes of the property business, it may not be deducted. In practice, though, some dual purpose expenses include an obvious part which is for the purposes of the business. We usually allow the deduction of a proportion of expenses like that. 

In summary – rent free or less than market value

  • Its unlikely that the expenses will be incurred wholly and exclusively for business purposes
  • Expenses not incurred for business expenses are excluded or restricted
  • Where a property is let below market rate, you can only deduct expenses up to the value of the rent received
  • You can not use rent free or less market rent to produce a loss for tax purposes. Any excess losses can not be offset against other rental profits or carried forward.

What about Covid?

  • Tenants should continue to pay rent and abide by all other terms of their tenancy agreement to the best of their ability. The government has made a strong package of financial support available to tenants, and where they can pay the rent as normal, they should do. Tenants who are unable to do so should speak to their landlord at the earliest opportunity.
  • In many, if not most cases, the COVID-19 outbreak will not affect tenants’ ability to pay rent. If a tenant’s ability to pay will be affected, it’s important that they have an early conversation with their landlord. Rent levels agreed in the tenancy agreement remain legally due and tenants should discuss with their landlord if they are in difficulty.

Guidance for landlords and tenants – GOV.UK (www.gov.uk)

steve@bicknells.net

How can you claim your £1,000 property allowance?

The property allowance is a tax exemption of up to £1,000 a year for individuals with income from land or property.

If you own a property jointly with others, you’re each eligible for the £1,000 allowance against your share of the gross rental income.

It was introduced in Finance Act (No2) 2017.

I have seen may tax payers use it incorrectly on their returns, putting in the allowance and claiming expenses, which is incorrect.

The property allowance applies to

  • UK and Overseas property businesses
  • Commercial and Residential Lettings

There are exclusions

  • Rent a Room – PIM4424
  • Individuals claim the Base Rate Finance Cost Allowance – PIM4460
  • Partnership Property – PIM4454

If your property income from UK and Overseas properties is less than £1,000 you will get full relief and don’t need to file a self assessment return.

If your income is over a £1,000 from UK and Overseas Property then you can choose whether its worthwhile, for example if your expenses exceed £1,000 you would not want to use the allowance as you can claim the actual expenses, there are some examples in PIM4482.

The Property Allowance can not create a property loss to carry forward.

If your property income exceeds £1,000 and you elect to use the Property Allowance, that would be ‘Partial Relief’.

You can choose to either deduct the £1,000 or the actual costs (this is bit I have seen incorrectly noted on tax returns, basically landlords have tried to claim both, which is not allowed)

You can decide on a year by year basis which is better – £1,000 or the actual costs.

Elections must be made by the 31st January following the tax year.

Here is an example from PIM4483

Stephanie computes partial relief as follows:

Step 1 – Calculate Total Receipts of the relevant property business:

The total receipts of the relevant property business is £1,200.

Step 2 – Subtract the Deductible Amount from Receipts:

The £1,000 allowance is subtracted from the total receipts for her property business. This leaves £200 (£1,200 – £1,000) of taxable profits for Stephanie’s property business.

The legal fees of £150 are not brought into account because you cannot claim both the property allowance and expenses.

There is further guidance at PIM4400

steve@bicknells.net

How can a developer buy a residential property SDLT free? Probate Relief

Stamp Duty (SDLT) can be expensive, normally a developer would have have to pay the extra 3% SDLT.

Acquisition by property trader from personal representatives

Finance Act 2003 (legislation.gov.uk)

3 (1) Where a dwelling is acquired by a property trader from the personal representatives
of a deceased individual, the acquisition is exempt from charge if the following
conditions are met.
(2) The conditions are—
(a) that the acquisition is made in the course of a business that consists of
or includes acquiring dwellings from personal representatives of deceased
individuals,
(b) that the deceased individual occupied the dwelling as his only or main
residence at some time in the period of two years ending with the date of
his death,
(c) that the property trader does not intend—
(i) to spend more than the permitted amount on refurbishment of the
dwelling, or
(ii) to grant a lease or licence of the dwelling, or
(iii) to permit any of its principals or employees (or any person connected
with any of its principals or employees) to occupy the dwelling, and
(d) that the area of land acquired does not exceed the permitted area

Meaning of “property trader”
8 (1) A “property trader” means—
(a) a company,
(b) a limited liability partnership, or
(c) a partnership whose members are all either companies or limited liability
partnerships

Meaning of “refurbishment” and “the permitted amount”
9 (1) “Refurbishment”of a dwelling means the carrying out of works that enhance or are
intended to enhance the value of the dwelling, but does not include—
(a) cleaning the dwelling, or
(b) works required solely for the purpose of ensuring that the dwelling meets
minimum safety standards.
(2) The “permitted amount”, in relation to the refurbishment of a dwelling, is—
(a) 10,000, or
(b) 5% of the consideration for the acquisition of the dwelling,
whichever is the greater, but subject to a maximum of £20,000.

This is also covered in SDLTM21040 – Stamp Duty Land Tax Manual – HMRC internal manual – GOV.UK (www.gov.uk)

This could be could be useful in the following circumstances

Property Flipping

Property Flipping is done when you buy a property do a small amount of work to it and then sell it for a profit.

Using this SDLT relief could significantly increase your profit.

Buy Refurbish Refinance Rent (BRRR)

This relief can only be used by a trading company, residential letting doesn’t count as trading. However, you could have a group of companies, one is a development company and one a residential investment company.

The development company buys the Probate Property and gets the relief.

Once its been refurbished the development company could sell the property or transfer it to the investment company.

Groups benefit from Group SDLT relief. Do you pay SDLT on Properties Transfers within a Group? – Steve J Bicknell Tel 01202 025252

steve@bicknells.net

Residential Letting – What is the Finance Cost Allowance and how are Unused Finance Costs used up?

This is often referred to clause 24 or section 24 relating to Finance Act 2015 (No 2) [Section 26 Finance Act 2016] that introduced the change which started from 6th April 2017. It took full force for the tax year 2020/21. The rules restrict interest relief to the basic rate of tax (20%).

The legislation was inserted into Income Tax (Trading and Other Income) Act 2005: Sections 272A, 272B and 274A-274C and Income Tax Act 2007: Sections 399A and 399B.

The legislation does not apply to Furnished Holiday Lets or Limited Companies.

Finance Costs include all finance costs, even those to buy furnishings and the incidental cost of arranging the finance.

The Relief

Its calculated as 20% of the lower of

  1. Finance costs not deducted from income, or
  2. The profits of the property business, or
  3. The adjusted total income

What is adjusted Total Income?

Net income is defined in the Income Tax Act 2007 Section 23

23 The calculation of income tax liability

To find the liability of a person (“the taxpayer”) to income tax for a tax year, take the following steps. Step 1

Identify the amounts of income on which the taxpayer is charged to income tax for the tax year.

The sum of those amounts is “total income”.

Each of those amounts is a “component” of total income.

Step 2

Deduct from the components the amount of any relief under a provision listed in relation to the taxpayer in section 24 to which the taxpayer is entitled for the tax year.

See [F1sections 24A and 25] for further provision about the deduction of those reliefs.

The sum of the amounts of the components left after this step is “net income”.

It excludes Saving and Dividend Income (ITA07/S18 (3) & (4)).

It excludes the personal allowance and blind persons allowance (ITA07/S23).

The end results is adjusted total income (ATI) – S274AA.

A tax reduction can not be used to create a tax refund but it can be carried forward.

Example 2020-21 onwards

Fred has

  • Employment Income £45,000
  • Residential Property Income £25,000
  • Mortgage Interest £10,000
  • Allowable expenses £5,000
  • Property Losses Carried Forward £15,500
  • Unused Finance Costs carried forward from 2019-20 £2,000

Calculation as follows

Employment Income£45,000
Property Income Calculation
Rental Income£25,000
Finance Costs – you can’t deduct Mortgage Interest£0
Allowable Expenses-£5,000
Property Business Profits£20,000
Less Property Losses Carried Forward-£15,500
Taxable Property Business Profits£4,500
Net Income – Employment and Property£49,500
Income Tax Calculation
Personal Allowance £12,500 at 0%
Basic Rate £37,000 at 20%£7,400
Higher Rate £0 at 40%
Income Tax Liability before Residential allowance£7,400

The Basic Rate Tax 20% reduction for Residential Property is the lower of

  1. Finance Costs not deducted in this case that’s £10,000 Mortgage and £2,000 Unused Finance Costs carried forward from 2019-20 which totals £12,000
  2. Property business profits which are £4,500
  3. Adjusted total income (exceeding personal allowance) £37,000 (£49,500 – £12,500)

The lowest amount is the

  • Property business profits which are £4,500

    • So the basic rate tax reduction is 20% x £4,500 = £900

    We can now deduct that from the £7,400, leaving £6,500 as the final income tax liability.

    Unused Finance Costs
    Residential Finance Costs£12,000
    Used in the Basic Rate Reduction-£4,500
    Unused Residential Finance Costs£7,500

    The Unused Residential Finance Cost is carried forward to the next tax year, in this example 2021-22.

    We repeat the calculations above in 2021-22, following all the same steps.

    Let’s assume in 2021-22 his net income from Employment and Property is £60,000

    The tax would be 0% x £12,570 plus 20% x £37,700 plus 40% x £9,730 = £11,432

    The Basic Rate Tax 20% reduction for Residential Property is the lower of

  • Finance Costs not deducted £10,000 Mortgage as in the previous year and £7,500
    • Unused Finance Costs = £17,500

  • Property business profits which are £20,000 (assuming its the same as the previous year – losses having been used up in the previous year)

  • Adjusted total income (exceeding personal allowance) £47,430 (£60,000 – £12,570)

    • The lowest is £17,500.

    So the basic rate deduction is £17,500 x 20% = £3,500

    £11,432 less £3,500 gives a final income tax liability of £7,932

    Unused Finance Costs
    Residential Finance Costs and carried forward amount£17,500
    Used in Basic Rate Reduction-£17,500
    Unused Residential Finance Costs to be Carried Forward£0

    steve@bicknells.net

    A Summary of Tax, Savings and Benefits of Electric Cars

    What is the plug-in grant?

    The plug-in grant has been around for several years as an incentive to purchase electric vehicles to curb climate change. The grant has been modified many times, but it currently offers £2,500 off of eligible low-emission cars and up to £16,000 for larger vehicles.

    You do not need to apply for the grant. The car dealer will include the grant in the vehicle’s price if it is eligible.

    • Cars: CO2 emissions of less than 50g/km and can travel at least 112km with zero emissions. The car must cost less than £35,000 and be on the list of government approved vehicles. The grant will pay for 35% of the car price up to £2,500.

    Grants for vehicle charging points

    In addition to the plug-in grant, you can also receive up to £350 towards the cost of a vehicle charging point. The Electric Vehicle Homecharge Scheme (EVHS) provides up to 75% of the installation cost on domestic properties in the UK.

    There is also the Workplace Charging Scheme (WCS) which is a voucher based scheme that provides support to businesses who install vehicle charging points.

    Both grants need to be applied for from the government’s website.

    HMRC Advisory Fuel Rate

    The advisory electricity rate for fully electric cars is 4p per mile.

    So you can claim 4p per mile for business miles in an electric car.

    Advisory fuel rates – GOV.UK (www.gov.uk)

    100% Capital Allowances

    Businesses of all sizes can claim 100% FYAs on capital expenditure on a car (CA23153) provided that:

    • the car is ‘unused and not second hand’, and is first registered on or after 17 April 2002;
    • it is an electric car or a car with qualifying CO2 emissions of not more than a specified amount;
    • the expenditure is incurred between 17 April 2002 and 31 March 2025; and
    • the expenditure is not excluded by the general FYA exclusions, see CA23110.

    Second Hand zero emission cars are added to the main rate pool and written down at 18%

    Benefit in Kind

    Cars first registered from 6 April 2020 (WLTP)

    CO2 emissions figureElectric range figure2020–212021-22
    0N/A0%1%
    1–50130 or more0%1%
    1–5070–1293%4%
    1–5040–696%7%
    1–5030–3910%11%
    1–50Less than 3012%13%

    steve@bicknells.net

    Is it a Repair, Replacement (RDI) or Improvement?

    This is probably one of the most difficult cost types to define and is extremely confusing for property investors.

    The guidance never seems to quite fit with the work undertaken.

    Its an issue for accountants too, often the investor lists all the costs rather than the projects so you end up with lots of entries like B&Q and have to try to reshuffle them into projects like a new kitchen.

    HMRC has a tool kit Capital v Revenue which gives some guidance.

    In general investors want costs to be repairs (which can be deducted from profit and save tax now) where as HMRC would probably prefer improvements (which are held back and used the Capital Gains Computation when the property is sold).

    In this blog I will try to give some further help aimed at owners of Buy to Let properties, the rules apply both to individual investors and those who invest via a company.

    Pre-Letting Costs

    The general rule is that if you buy a run down property that needs work doing on it before it can be let then that work is an improvement (capital cost).

    However, if you had a letter from an letting agent saying it was lettable in its purchase condition then the works could be a repair (revenue).

    If substantial work is needed, its best to discuss this with your accountant before the work is done to determine its status as an Improvement or Repair.

    The important point is the property needs to in fit state to let before the alterations, refurbishment, repairs are carried out if you want the costs to be repairs.

    Here is HMRC’s Guidance from PIM2030

    Repairs after a property is acquired

    Repairs to reinstate a worn or dilapidated asset are usually deductible as revenue expenditure. The mere fact that the customer bought the asset not long before the repairs are made does not in itself make the repair a capital expense. But a change of ownership combined with one or more additional factors may mean the expenditure is capital. Examples of such factors are:

    • A property acquired that wasn’t in a fit state for use in the business until the repairs had been carried out or that couldn’t continue to be let without repairs being made shortly after acquisition.
    • The price paid for the property was substantially reduced because of its dilapidated state. A deduction isn’t denied where the purchase price merely reflects the reduced value of the asset due to normal wear and tear (for example, between normal exterior painting cycles). This is so even if the customer makes the repairs just after they acquire the asset.
    • The customer makes an agreement that commits them to reinstate the property to a good state of repair.

    Repairs

    HMRC have agreed “A replacement of a part of the “entirety” with the nearest modern equivalent is allowable as a repair for tax purposes.” (Tax Bulletin 59)

    Examples

    • Replacing single glazed windows with double glazed windows
    • Replacing guttering with a new modern guttering
    • Replacing lead pipes with copper or plastic pipes
    • Replacing wooden beams with steel girders

    What about Kitchens?

    The following refurbishment works would be repairs

    • Stripping out
    • Replacing Base Units
    • Replacing Wall Units
    • Replacing Work Tops
    • Re-tiling
    • Floor repairs
    • Plastering
    • Wiring

    Provided you are replacing with a similar standard kitchen

    But if you add storage or equipment these items would be capital improvements.

    There are also special rules relating to expenditure on specified parts of buildings called
    ‘integral features’. The following are integral features:


    • an electrical system (including a lighting system)
    • a cold water system
    • a space or water heating system, a powered system of ventilation, air cooling or air
    purification, and any floor or ceiling comprised in such a system
    • a lift, an escalator or a moving walkway
    • external solar shading.


    Under these rules if expenditure on an integral feature represents the whole, or more than 50%,
    of the cost of replacing the integral feature, then the whole of the expenditure is to be treated as
    capital expenditure

    Replacement of Domestic Items (RDI)

    Since 2016 Replacement of Domestic Items Relief has replaced the Wear and Tear Allowance. The rules are in PIM3210.

    Note – RDI is not given for the purchase of new items that are not replacements

    In order for relief to be given, 4 conditions must be met:

    Condition A – the individual or company looking to claim the relief must carry on a property business that includes the letting of a dwelling-house(s).

    Condition B – an old domestic item that has been provided for use in the dwelling-house is replaced with the purchase of a new domestic item. The new item must be provided for the exclusive use of the lessee in that dwelling-house and the old item must no longer be available for use by the lessee.

    Condition C – The expenditure on the new item must not prohibited by the wholly and exclusive rule (see BIM37000) but would otherwise be prohibited by the capital expenditure rule (see BIM35000).

    Condition D – Capital Allowances must not have been claimed in respect of the expenditure on the new domestic item.

    If the 4 conditions are met, then a deduction for the expenditure on the new item can be claimed.

    However, a deduction is not allowed if:

    • The dwelling-house in question is, in full or part, a furnished holiday letting (special rules apply to FHL’s)
    • Rent-a-Room receipts have been received in respect of the dwelling-house in question and Rent-a-Room relief has been claimed in relation to those receipts.

    If the new item is of broadly the same quality/standard as the old item and doesn’t represent an improvement then the deduction is the cost of the new item. Note that for these purposes, just because an item is brand new does not make it an improvement over an item which has been in use for several years and suffered general wear and tear. For example, a brand new budget washing machine costing circa £200 is not an improvement over a 5 year old washing machine that cost around £200 at the time of purchase (or slightly less, taking into account inflation).

    RDI will be given for ‘domestic items’ such as:

    • Moveable furniture such as beds and free-standing wardrobes.
    • Furnishings such as carpets, curtains and linen.
    • Household appliances such as televisions, fridges and freezers.
    • Kitchenware such as crockery and cutlery

    Improvements

    If an alteration increases the market value of the building, changes its function, or extends the life of the whole building then its an improvement.

    We also noted under pre-letting that work to make a property lettable could be an improvement.

    PIM2030 states

    But there is usually no improvement if trivial increases in performance or capacity arise solely from the replacement of old materials with newer but broadly equivalent materials. For example, the replacement of pipes or storage tanks of imperial measure with the closest metric equivalent may result in slightly increased diameter or capacity but the cost is still revenue expenditure.

    Where a significant improvement arises from the change of materials, the whole of the cost is capital expenditure. This includes things like redecoration after the main work has been done (redecoration would ordinarily be a revenue expense). The entire cost is capital expenditure, including the expense of making good any damage to decorations.

    Alterations to a building may be so extensive as to amount to the reconstruction of the property. This will be capital expenditure and it can’t be deducted as an ordinary revenue business expense. 

    steve@bicknells.net