A Complete Property Tax Guide for Landlords and Property Investors

Rent-to-rent investments often fall under the category of trading activities rather than straightforward property rentals. Rental income generated from subletting is treated as trading income, making Rent-to-Rent investors subject to income tax.

This differentiation is essential for investors to accurately report their earnings and fulfil their tax obligations.

In addition to income tax considerations, self-employed Rent-to-Rent investors must also be aware of their National Insurance (NI) obligations. Rent-to-rent investors are subject to both Class 2 and Class 4 National Insurance contributions.

Class 2 contributions are usually linked to entitlements such as the state pension, while Class 4 contributions, calculated as a percentage of annual profits, fund additional benefits and services.

Should the investor choose to conduct Rent-to-Rent business through a limited company, the profits generated by the company will be subject to corporation tax. This rate can fluctuate within a range of 19% to 25%, based on the profits of the company.

When establishing lease agreements with landlords for Rent-to-Rent purposes, the possibility of SDLT obligations arises, contingent on the lease's value and duration. The specific SDLT rates can differ, making it crucial to understand possible obligations prior to entering any agreements.

When it comes to operating a Rent-to-Rent business focused on service accommodation, understanding the VAT implications is paramount. Unlike long-term residential rentals which are VAT-exempt, service accommodation, often seen on platforms like Airbnb, falls under VAT regulations. This means that landlords offering service accommodation must charge VAT on their rental income. If the cumulative taxable rental income surpasses £85,000 within a year, VAT registration with HMRC is mandatory.

When engaging in renovations on an existing building, the standard practice generally involves charging Value Added Tax (VAT) at the standard rate of 20%.

However, if you're involved in converting premises into an HMO, you may qualify for a reduced VAT rate of 5%. It's important to note that to be eligible for this reduced rate, obtaining necessary planning consent and securing building control approval are prerequisites

A notable consideration for HMO investors in the UK is the additional 3% Stamp Duty Land Tax surcharge on the purchase of second homes or investment properties, which includes HMOs. For HMO investors, this means a higher initial financial outlay upon purchase.

Whether you're expanding your property portfolio or entering the market as an HMO investor, the additional SDLT surcharge necessitates careful budgeting and financial planning.

When it comes to selling an HMO property in the UK, it's crucial to note that HMOs don’t qualify for Private Residence Relief (PPR) applicable to primary homes. This means that any profit from selling an HMO is subject to Capital Gains Tax at 18% or 24%, based on the tax band of the taxpayer.

However, you may still qualify for Business Asset Disposal Relief, which means that you’ll only pay CGT at 10% on gains on qualifying assets.

One of the more controversial sides of the HMO housing market is the Capital Allowance Claim. Many HMO landlords have made attempts at the claim, but HMRC has contended that they will not accept any claim for Annual Investment Allowance (AIA) on HMOs. However, ‘Plant and Machinery Allowance’ can still be claimed, which is available in areas except ‘dwelling houses.’

In the context of capital allowances for Houses in Multiple Occupation (HMO) properties, it is crucial to clarify that the term 'common parts' primarily refers to shared areas like a common entrance lobby, corridors, stairs, lifts, and building installations such as mains, gas, electrical services, and security systems. These elements do not provide living facilities and will count outside the ‘dwelling houses.’

The court case [Tevfik v HMRC] holds significance for owners of HMOs, offering clarity on the eligibility of capital allowances. The ruling addresses situations where these allowances can be claimed and where they cannot. The following two cases help us to understand the eligibility for capital allowance in HMOs.

Case I - You rent a five-bedroom property to a group of people forming different households. Your property has a shared kitchen and several bathrooms that are shared by the occupiers. In this case, you cannot claim capital allowance on your property because the house as a whole is a dwelling house, and common parts are within the dwelling. This was made clear in the case of Hora Tevfik v HMRC.

Case II – You rent three one-bedroom studios in an HMO. Each property contains a kitchenette, cooking facilities and a shower area. As these properties provide the facilities required for ‘day-to-day private domestic existence’ within it, claims for plant and machinery allowance in respect of shared parts of houses in multiple occupations (such as hallways, stairs, landing, attics, and basements within the house, are not part of the dwelling house) and are available for allowance.

One of the major differences between individual landlords and corporations such as SPVs is the applicable tax. While the individual and landlords in partnership declare and pay income tax on their individual returns at either 20, 40, or 45 per cent, these corporations are liable to corporation taxes and pay the following rates:

• Companies making up to £50,000 in profits are taxed at 19%.
• For profits ranging from £50,000 to £250,000, the tax rate starts at 19% for the first £50,000 and then increases progressively to 26.5% for the remaining profit within this bracket.
• If the company’s total taxable profits exceed £250,000, the tax rate on all profits is a flat 25%.

One notable advantage of using Property SPVs for property investment lies in the ability to claim mortgage interest as allowable deductions against rental income.

The Interest Relief Restriction Section 24 is not applicable to companies, particularly beneficial for property investors seeking to enhance their cash flow and improve their overall returns.

The Annual Tax on Enveloped Dwellings (ATED) is a tax regime introduced by the UK government to address tax avoidance in property ownership, particularly targeting properties held within corporate structures. This annual tax is levied on UK residential properties valued above £500,000 and owned by "non-natural persons," mainly companies.

The amount of ATED payable varies depending on the property's value, either at the time of purchase or as of 1 April 2022, whichever is later:

If your plan involves eventually transferring ownership of your rental properties to family members, adopting a Property SPV structure could be a smart move. This strategy simplifies and enhances the tax efficiency of the ownership transition compared to transferring individual properties.

Here, the property remains within the ownership of the SPV, and the alteration primarily involves changes in the SPV's directorship.

Non-Resident Landlords Scheme (NRLS) is an arrangement requiring the letting agents or the tenants of non-resident landlords to withhold 20% tax on the property income. The letting agents or the tenants subsequently pay the tax to HMRC at the end of each quarter. For the purposes of NRLS, a tax year runs from 1 April to the following 31 March.

Under the NRLS, letting agents must:

• Register with HMRC within 30 days of the date on which they need to operate the Scheme,
• Provide a quarterly return and payment,
• Provide an annual return and payment and
• Provide their landlords with a certificate, as shown below.

However, Non-resident landlords can apply to receive their rental income in full, i.e. with no tax withheld, if they wish to do so. The application is sent via the NRL1i if the landlord is an individual, NRL2i and NRL3i if the landlord is a company and a trustee, respectively.

SDLT rates for non-resident landlords in the UK are distinct from those for resident landlords. Non-resident landlords are subject to an additional 2% surcharge on top of the standard SDLT rates. 

For instance, if a property is valued at £500,000, the SDLT rate for a non-resident landlord would be 7%, including the 2% surcharge. In contrast, resident landlords are not subject to this surcharge, making the SDLT rates comparatively higher for non-resident landlords, potentially impacting the overall cost of property acquisition.

Prior to April 2017, non-UK domiciled individuals and trustees could avoid IHT on UK residential properties by holding via offshore entities. However, reforms introduced in April 2017 ended this practice, obligating non-domiciles to pay IHT on all UK residential properties, even indirectly held through offshore structures.

Presently, individuals possessing enveloped residential property owners now face a 40% IHT charge upon their passing, effective from April 2017. Additionally, trusts holding residential property will incur ten-year charges at 6% based on the property's value moving forward. Transfers of enveloped property into trusts attract immediate taxation of up to 20%, while transfers out of trusts are subject to taxation of up to 6%.

NRCGT applied to direct sales of UK residential property from 6 April 2015. However, from 6 April 2019, the scope expanded to include indirect sales of UK property or land as well.

Indirect sales occur when a non-resident individual or entity sells or disposes of an interest in an asset deriving 75% or more of its value from UK land. For this to qualify as an indirect sale, the individual or entity must hold at least a 25% interest in the asset.

Therefore, taxable gain is determined by comparing the property's current market value with its original cost. Yet, a different rule applies to non-UK resident companies.

Those previously not liable for UK Non-resident Capital Gains Tax (NRCGT) will calculate the gain based on the difference between the present market value and the value as of April 2015.

The introduction of the ROE has brought about a big change for the non-resident landlords holding UK properties through a corporate structure. It mandates the disclosure of ownership details, removing the previous secrecy. This transparency combats illicit activities, benefiting regulators, the public, and investors.

Non-resident landlords must not only reveal owners during registration but also update this annually, adding administrative tasks. Ignoring ROE can result in property freezing, daily £2,500 fines from 1 February 2023, and potential imprisonment for five years.