The vast majority of UK properties are privately owned by individuals, many having been purchased as an investment rather than as a main residence.
The private investor landlord is taxed on the amount of letting income received less allowable expenses incurred on a fiscal year basis, as well as on any capital gain that may be made on the sale. Inheritance tax may be payable on the value of the property held at the date of death. Stamp duty land tax (Land and Buildings Transaction Tax in Scotland, Land Transaction Tax in Wales) may be payable on the purchase of the property.
Individuals who purchase property jointly, intending to rent for the long term, are taxed on their share of the annual rental profits made or gains made on the sale. Joint owners of property purchased with the intention to sell after restoration are likely to be in a ‘trading partnership’ with each being taxed as a self-employed ‘property dealer’. For a ‘trading’ partnership to exist, there needs to be a degree of organisation with a view to making a profit (similar to that required for an ordinary commercial business). A partnership agreement is, therefore, recommended.
If the landlord has no other income, the annual personal allowance is deducted from any profit made on the letting income in full. If he or she has other income, the personal allowance may not be available and, as such, the profits made will be taxed at the landlord’s marginal rate of tax.
A ‘Property Allowance’ is available, the claiming of which removes the liability to tax should gross rental income be less than £1,000 (see Tip 31). This allowance is particularly useful should the gross income less the allowance be lower than the income minus expenses, producing a lower profit.
Depending upon the level of letting profit, being a sole investor would normally be expensive in comparison with joint investor ownership. A sole investor will be taxed in full at his or her marginal rate of tax whereas, with joint investor ownership, the letting profit is split with each owner’s share of profit being taxed at his or her respective marginal rate. Therefore, should a property be jointly owned 50:50 and one taxpayer be a basic rate taxpayer and the other a higher or additional rate taxpayer, the total tax bill will be reduced by 50% of the difference between the tax due at the higher and lower rates as compared with the tax that would be payable were the income received solely by the higher or additional rate taxpayer. If the taxpayer was a basic rate taxpayer and the property was put in joint names where one partner was a higher rate or additional rate taxpayer then the tax bill will increase.
Further tax reduction is possible should one investor be a non-taxpayer, as the full amount of that individual’s personal allowance will be available for offset.
The example shows the tax position should one owner be taxed at a higher rate than the other.
Joanne and Robert are married and own a portfolio of rental properties 50:50.
For the year 2019/20, each has other income such that Joanne is a 20% basic rate taxpayer, but Robert is a 45% additional rate taxpayer.
Total net rental profit is £825 per month, i.e. £9,900 per year = £4,950 each.
Joanne: Tax liability of £990 (£4,950 @ 20%).
Robert: Tax liability of £2,227.50 (£4,950 @ 45%).
If Robert owned the properties as a sole investor, the tax liability would be £4,455; by owning the properties jointly with Joanne, there is a tax saving of £1,237.50. This saving could be doubled should the property be solely in Joanne’s name and the profit does not take her into the higher rate tax band.