How to Reduce Income Tax on Rental Property
- You can transfer the beneficial interest in the property to your partner so that you benefit from their tax-free allowance and lower tax bracket.
- You pay 0% tax on a taxable income of £12,570.
- Top Tip: If your outgoings from the rental business are more than the rental income, the losses for that tax year can be used to reduce the profit made in the next year.
- If you send an incorrect tax return or fail to tell HMRC, the maximum penalty can be up to 100% of the tax liability.
Whilst you can reduce income tax on rental property, it may cost you more in the long run, as you trigger other taxes such as Stamp Duty Land Tax and Capital Gains Tax.
You can explore different ownership structures or leverage specific tax schemes and reliefs, but each strategy should be carefully considered depending on your circumstances.
By implementing such strategies, you will be able to effectively manage your tax obligations whilst also optimising your rental property investments for longer-term financial success.
We explain in more detail how to reduce income tax on rental property for each strategy and flag potential issues around the rental income tax bill and other taxes that could arise.
How do you pay income tax on rental income?
You need to declare your rental income in your end-of-year tax return, for the year from the 6th of April to the 5th of April.
Your tax return must be filed online, no later than the 31st of January following the 5th of April - so you get 9 months to file your accounts.
You pay an on-account tax payment on the 31st of July and the balance must be paid in full by the 31st of January after you've filed your tax return for the year.
If you share the beneficial interest with someone else, then you only declare your share of the rental income in your tax return.
You share property income in proportion to your beneficial interest in the property and this should be declared within a Deed of Trust or deed of assignment
You are liable to pay tax on rental income on the day it is received. If the rent is due on the 31st of March but received into your bank on the 6th of April, then it falls into next year's tax year for paying tax even though it was due in the previous tax year.
Arrange a free consultation with one of our experienced conveyancing executives if you are:
- Severing joint tenancy to register as tenants in common, or vice versa.
- Buying with your unmarried partner, to protect your shares in case the relationship breaks down.
- Married or civil partners let a property, and one of you is in a lower tax bracket.
- Buying with friends or family, to protect shares based on initial and ongoing contributions from each party.
- Going to invest money in unequal shares, improvements, or renovations on the property.
- Buying a property with a mortgage, where one or more borrower(s) will not be a legal proprietor.
- Unable to buy the other owner out and want to surrender your share.
Transferring beneficial interest to your spouse
It is common practice to transfer the beneficial interest in the property to your partner so that you can benefit from their tax-free allowance and lower tax bracket.
You'll also benefit from sharing their capital gains tax allowance on disposal (whilst this is still available to offset).
You can share beneficial interest in any share you choose whether it be 99%/1%, 50%/50% or even 80%/20%.
You do not need to be a legal owner to be a beneficial owner. Read more - Beneficial Ownership vs Legal Ownership.
The actual way you share beneficial interest can be done in many different ways, such as:
- Transfer of equity and draft a deed. The legal owner adds someone to the legal title and they agree on how they share the beneficial interest and record this in a Deed of Trust. If there is a mortgage, you'll need to obtain their consent to add the new party to the title and if the mortgage debt is more than £40,000, then SDLT may be payable as consideration for the transfer. Read more - What is the Transfer of Equity Process?
- Draft a deed of assignment. Where you don't want to add the name of the party to the legal title, but want to share the rental income with them, you can draft a Deed of Assignment which assigns the beneficial interest to them and as such the rental income. In most cases, lender consent isn't required, however, read your mortgage terms and conditions to check. There is no Stamp Duty if there is no consideration. Read more - Deed of Assignment for assigning beneficial interest in property.
- Sever Joint Tenancy and draft a deed of assignment. Where you are already a joint legal owner, but the property is held as Joint Tenants, you must first sever the joint tenancy and register as tenants in common, so you can then share the rental income in unequal shares. As Joint Tenants, you own rental income 100% together, so declare 50/50 in your tax return. As tenants in common, you can share in any proportion you choose. Stamp Duty Land Tax may be payable if there is a mortgage of £40,000 or more. Read more - How to sever a joint tenancy.
Assigning part of the beneficial interest to your spouse is how to reduce capital gains on the sale of rental property, however, if you are married, then you should file a Form 17 to HMRC to confirm how you share the annual rental income.
- Get up-to-date property tax advice on SDLT, CGT, IHT, personal vs partnership vs company structure.
- Free 15-minute initial consultation with a qualified accountant from our panel of tax advisors.
- Ask your tax questions and get guidance on what you can do next.
- If further accountancy work is required, you'll be quoted for this as a separate piece of work with no obligation to purchase.
Reducing your rental income tax but paying other taxes
You may find that transferring your share of the rental income to someone else may reduce your income tax, but trigger other taxes such as Capital Gains Tax and Stamp Duty Land Tax.
- Transfer Beneficial Interest Where you transfer beneficial interest (known as a Transfer of Equity) in property, you have to pay Stamp Duty Land Tax on the consideration, which could be money changing hands or the mortgage debt on the title. Read more - What stamp duty is payable when you transfer equity?
- Transfer to Company Transferring property from yourself to a company attracts stamp duty at full market value and second home stamp duty. Read more - What stamp duty is payable when you transfer property into a company?
- Capital Gains Tax on the Disposal If you dispose of an interest in a property that isn't your Principal Place of Residence, then Capital Gains Tax could be payable. Read more - Capital Gains Tax on Gifted Property and Capital Gains Tax on Property for Married Couples.
Transferring the buy to let into a Limited Company
Since 2022, you are no longer allowed to offset mortgage repayments from the income on the rental property, which means you pay more income tax.
On the other hand, a company can deduct mortgage repayments from the property allowance and the rental income, so you pay Corporation Tax on the net profit. You can also deduct other property costs to reduce the net profit further.
Once you've paid your Corporation Tax, you can then distribute the profit after tax as dividends, which attract a lower tax than rental income.
Stamp Duty Land Tax is payable if there is any consideration and you will be liable for the Capital Gains Tax due on disposal of the asset to the company.
Corporation tax relief
Limited companies benefit from a lower corporation tax bill compared to a higher income tax bill for individual landlords. In the UK, the corporation rate is lower than the top rates of income tax.
Landlords transferring properties to a limited company may also be eligible for incorporation tax relief, allowing you to defer capital gains tax until shares in the company are disposed of.
Offsetting allowable expenses to reduce rental income tax
Even though you can't deduct the full amount of the mortgage repayments from the rental income, you are allowed to deduct other rental property expenses and legal fees.
Mortgage interest
Landlords can deduct mortgage interest payments on loans used to purchase, improve, or maintain rental properties.
Changes in tax rules mean that full mortgage interest relief is no longer available for individual landlords, instead transitioning to a basic tax rate reduction on interest payments.
Repairs to the property
Costs incurred for repairs and maintenance of rental properties are usually deductible. This includes expenses for plumbing, electrical issues, painting, and general upkeep.
Utility charges
Costs associated with utilities such as gas, electricity, and water, as well as service charges like communal cleaning and maintenance, can be deducted.
Council tax and ground rent can also be offset against rental income.
Fees
Fees paid to letting agents for finding tenants, managing the property, and collecting rent on the landlord's behalf are all allowable expenses.
Expenses related to legal advice, accountancy fees, and other professional services directly related to the property are also allowable.
A full list of allowable expenses to reduce the tax on rental income is set out here - HMRC - Allowable expenses.
What rate of income tax do you pay on rental income?
The income tax bands on work and rental income are as follows:
| Tax Band | Taxable Income (Employment and Property) | Tax Rate |
|---|---|---|
| Tax Band Tax free allowance | Taxable Income (Employment and Property) £12,570 | Tax Rate 0% |
| Tax Band Higher rate | Taxable Income (Employment and Property) £50,271 to £150,000 | Tax Rate 40% |
| Tax Band Additional rate | Taxable Income (Employment and Property) over £150,000 | Tax Rate 45% |
Source: HMRC - Income Tax Rates
Carrying over rental property losses
If in any tax year, the outgoings from the rental business are more than the rental income, such as having an empty flat or if you need to do large repair works, then the losses from that year can be used to reduce any profit made the next year.
Calculation of rental property loss
- Identifying rental loss: Determine the net profit or loss from rental activities for the tax year by subtracting allowable expenses from rental income.
- Assessing allowable expenses: Ensure all eligible expenses are accurately accounted for, including mortgage interest payments, repairs, maintenance, letting agent fees, insurance, and other relevant costs.
Utilising rental property losses
Offset against other income: In the UK, rental property losses can typically be carried forward and used to offset future rental profits.
If the property owner has other taxable income, such as employment or business profits, rental losses can often be offset against this income in the same tax year.
Carrying over losses: If rental property losses cannot be fully utilised in the current tax year, they can be carried over to future tax years. This means that the losses can be deducted from future earnings, reducing the rental income tax.
Claiming losses against future earnings: Rental property losses can usually be carried forward indefinitely until they are fully utilised against future rental profits.
Restrictions on loss relief: There may be restrictions on the amount of losses that can be offset against other income. This is dependent on your tax status and circumstances.
Tax planning considerations: It's advisable to consult with a tax advisor or accountant to fully optimise the use of rental property losses. They will be able to guide you through the specific tax rules and regulations.
Transferring buy to let from a partnership to a Limited Company
If you currently own a property in a Partnership and it is run as a business, not an investment, then you can transfer the property into a limited company and not pay any Stamp Duty Land Tax. Read more - How do I transfer a partnership to a limited company with no SDLT?
Steps involved in the transfer
- Valuation of the property - this determines any tax implications of the transfer.
- Transferring ownership - legal documentation will need to be prepared, typically involving conveyancing and professional legal assistance.
- Tax considerations - it's essential to understand if you will need to pay capital gains tax and the stamp duty land tax considerations.
Once the property is held within a limited company, you can benefit from the usual tax relief opportunities including the ability to offset mortgage interest against rental income and claiming capital allowances on qualifying expenses.
You should obtain accountant advice before looking to minimise your rental income tax by transferring your property into a partnership.
Capital allowances for furnished holiday lettings
Furnished holiday lets (FHLs) in the UK can benefit from special tax treatment, including the ability to claim capital allowances on qualifying items.
Capital allowances allow landlords to deduct the cost of certain assets from their taxable rental income and future profits.
Unlike standard residential properties, FHLs are considered a trade for tax purposes which provides a potential advantage for landlords in terms of tax relief.
It's important to note that specific criteria must be met for a property to qualify as a furnished holiday let, such as the property is available for commercial letting for at least 210 days a year and being let for at least 105 days annually.
Rent a room scheme
The rent-a-room scheme in the UK allows individuals to earn up to a threshold of £7,500 per year tax-free from letting out furnished accommodation in their main residence.
This scheme is particularly beneficial for those who rent out a spare room or part of their home, making it a straightforward way to reduce rental income tax.
Landlords can use this scheme by renting out a spare room to lodgers or offering a Monday to Friday short-term let to tenants. If the rental income stays within the £7,500 threshold, you won't have to declare it.
Do you need help reducing the income tax on your rental property?
We can help with this, whether it's by drafting a deed or transferring the property to a limited company. A SAM advisor will talk you through your options and guide you throughout the entire process.
Caragh is an excellent writer and copy editor of books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey, property law and mortgage-related articles.
