Efficient Ways To Save Tax On Property Income

Save Tax On Property Income

In the UK, property income is the income you earn from your land or property. If you receive an income by renting out a part of your home or parking space, it will be your property income. The same applies to renting out caravans or houseboats. Again, if you rent your property to somebody for commercial activities, you invite taxes. For the unversed, the property tax includes Stamp Duty Land Tax (SDLT), Capital Gains Tax (CGT), Income Tax on landlords(residential and non-residential), Annual Tax on Enveloped Dwellings (ATED), and the Inheritance Tax (IHT). All this sounds so complex! Honestly, it feels pathetic to pay high taxes. So, it is time to figure out some efficient ways of tax saving on your property income.

Multiple Dwellings Relief (MDR)

When you buy a property, you become liable to pay the Stamp Duty Land Tax (SDLT). So, do some tax savings on SDLT by purchasing two to five properties in a single transaction. This strategy will make you eligible for the residential Multiple Dwelling Relief (MDR). In MDR, rather than the buying price of individual properties, SDLT applies only to the average value of the total number of properties. You can also purchase multiple mixed-use properties to claim MDR. Remember, for residential properties, you are liable to pay the SDLT only if the property value exceeds £125,000. Also, if you are a first-time home buyer, you are not required to pay SDLT if the property value is £300,000 or less! Again, as far as the non-residential land and commercial properties are concerned, the SDLT is applicable if its worth is more than £150,000.

Set Up A Limited Company

Unfortunately, when you invest in a property to become a landlord, you attract a higher income tax band. For example, if your profit is £50,000 from your property business, your income tax band will be a whopping 40%. However, when you set up a limited company, you have to only pay the corporation tax, which is currently at 19% for the same profit. Even if it increases shortly, it will be nowhere near 40%. No wonder; you can save tax on your property income because the tax difference is significant! So, the best move can be to make your property portfolio after setting up a limited company. This will also help you to reduce the inheritance tax to some extent.

Remortgaging property

If you are a property owner and planning to buy another property, remortgage your house to finance another property. This will prove handy if the value of the mortgaged property has increased significantly. Remember, the Capital Gains Tax (CGT) is applicable when you sell a property. So, when instead of selling your existing property to buy another one, you are remortgaging it, your capital gains tax liability will become zero!

Seek tax credit for mortgage interest

The UK government has introduced tax relief for mortgage interest, and it is called a tax credit. So, if you are in a higher tax band and pay income tax at a 40% rate, you can seek a tax relief of 20 percent on your mortgage interest. However, you can receive this tax credit for mortgage interest only if you are a private landlord and own your property as an individual.

Know the allowable expenses

There are several allowable expenses for landlords, such as maintenance and repair costs, agent fees, accountant’s fees, insurance premiums, gas and electricity costs, legal fees for lease renewable, advertising costs, and council tax (as applicable). You can deduct these expenses before calculating your tax on your property income to reduce your tax exposure.

Make the most of Rent-a-Room scheme

If you rent a furnished room in the house where you are residing at present, you can make the most of the Rent–a-Room scheme. It enables you to pay no taxes if your annual rental income does not exceed the £7,500 threshold.

However, one of the most efficient ways to save tax on your property income is by hiring an experienced accountant who can guide you at every step.