Could you be paying unnecessary tax on your property portfolio?

​As many of you will be aware, tax legislation for private landlords changed in April 2020. The case study below illustrates how the UK tax legislation can effect private landlords.

Could you be paying unnecessary tax on your property portfolio?

Private landlord tax vs that of a private hotelier


Let’s assume that both businesses own assets worth £2,000,000 and have 75% LTV mortgages secured on them at an interest rate of 5%. In other words, their annual finance cost bill is £75,000.


Now let’s assume that both businesses make profits after finance costs and all other expenses of £50,000.


The hotelier will pay £7,500 of income tax. This is broken down as follows; £0 on his first £12,500 of net profit and 20% tax on the next £37,500.


However, the private landlord cannot treat his finance costs as a legitimate cost of business in the same way as the hotelier. Accordingly, his tax bill is £27,500. This is because his taxable income is treated as being £125,000 due to being unable to claim his finance costs as business expenses. Furthermore, for every £2 of taxable income over £100,000 he loses £1 of his nil rate tax band.  Accordingly, the landlord pays tax at a rate of 20% on the first £37,500 (which equates to £7,500) and then 40% tax on the other £87,500 (which equates to £35,000). This adds up to a whopping £42,500. The government then grant him a tax credit equal to 20% of his finance costs, in other words £15,000 off the £42,500 leaving him with a net £27,500 of tax to pay.


To summarise, the private landlord pays more nearly four times as much tax as the private hotelier, even though their financing costs and business results otherwise produce identical levels of actual profit.

If you are affected by this problem, the first thought on your mind might well be to move your rental property business into a Limited Company. However, here is where things get even more unfair. 

If both the landlord and the hotelier operated their businesses within a Limited Company structure, they would pay exactly the same amount of tax.

(Case Study Source - Property118)

The transfer of property from private ownership into a Limited Company is treated as a sale and purchase transaction. Accordingly, Capital Gains Tax and Stamp Duty Land Tax could apply. You also need to consider the financing of the properties you are transferring the ownership of.

In most cases there are business structures and tax relief to mitigate these problems.  However, it’s always not that straight forward.

This is why it is important to get the right advice, and that is where Insight Accountancy Services step in (in association with Cotswold Barristers)
We care about how the above has the potential to affect you and your portfolio. You can visit their website here.

Get in touch with us on 01603 268083 and we would be happy to refer you to IAS to get booked in for a tax planning consultation with a specialist landlord tax consultant.