Property investment tax can be a nightmare to navigate.

As market and tax changes have driven a more strategic approach to buy-to-let investment, many myths and misconceptions have emerged on how to reduce your tax bill and boost your rental profits.

Meanwhile, strategies that do offer value for tax mitigation have found themselves overshadowed by misinformation; and new buy-to-let investors are all too quick to discount them entirely.

At GNS Associates, our property tax and accounting specialists have heard them all. 

That’s why we’ve put together this guide to five of the most widely believed myths around property tax. 

What happens if you buy into them?

• Two of them could leave you with an HMRC penalty of up to 100% of your unpaid tax liability.
• One of them could see you with higher tax and mortgage bills than you started with.

• Two of them could be blocking your way to one of the most tax-efficient solutions for higher tax rate investors.

Don’t let these misconceptions fool you. Let’s dive into the top five myths of property tax, and how you can avoid them…

Myth #1: you can gift a portion of your rental income to your spouse to reduce your tax liability

HMRC taxes each person in a marriage or civil partnership individually; which means one person can end up in a higher tax bracket than the other.

Many property investors still think that splitting their rental income across both their own and their spouse’s tax return is enough to prevent the income pushing either of them into a higher tax bracket; so they can get away with a lower tax bill.

If only it were that simple. 

HMRC is wise to tax avoidance tactics such as this; which is why they’ll want to see that your spouse actually owns a percentage of the property investment business itself if they’re receiving income from it.

To split your rental income without incurring the taxman’s wrath, you’ll need to gift a percentage of the property ownership to your partner; which means:

• setting up a trust deed
• specifying the percentage ownership between you and your spouse (it doesn’t have to be a 50:50 split, but it’s generally recommended when it comes to capital gains tax down the line)
• notifying HMRC within 60 days of the ownership change via a Declaration of Trust (aka Income Tax form 17)

Bear in mind, if the property in question still has outstanding mortgage debts, the property ownership transfer will then be liable for stamp duty land tax; but there is a way around this.

The catch? You’ll need to retain full responsibility for the mortgage debt.

This means there’s no ‘chargeable consideration’ for the property ownership gift, and no SDLT to pay; but it also means you can’t split the mortgage payments between you and your spouse.

Myth #2: you can always deduct repair and maintenance expenses from your taxable income

So, you’ve been scouring property listings and auctions, and you’ve found the perfect bargain. 

It’ll need a bit of work before you can rent it out to tenants, but that’s no problem; you can just claim back the repair work costs, right?

Unfortunately, the answer is no.

If you need to carry out repairs and maintenance on a newly acquired property to bring it up to a habitable state, the work is considered a capital expense.

Capital expenses cannot be deducted from your rental profits on your self-assessment. (However, they can be deducted from your capital gains tax liability when you eventually sell the property.)

You can claim for repair and maintenance work carried out after a tenant has moved into the property; but of course, the property must be in a habitable condition before you let it out.

Here’s our recommendation; if you’re fixing up a new acquisition to your property portfolio, map out the exact scope of work needed to make the property habitable, and don’t spend too much on non-essential repairs.

Once you’ve moved tenants into the property, ongoing maintenance and repair can then be offset from your taxable income.

Bonus info: There’s one more caveat to keep in mind with repair and maintenance expenses. Property improvements and alterations also count as non-deductible capital expenses.

In other words, you can claim the costs for ‘like-for-like’ repairs and refurbishments, but you can’t claim for things which boost the value of the property; from minor things like replacing single-glazed windows for double or triple glazing, to major improvements like building a whole new extension.

These rules remain the same whether your property is occupied by tenants or not.

Myth #3: You need a limited company structure to make money from property investment

Not necessarily.

It’s true that property investment has become more expensive in recent years; with the introduction of Section 24 tax rules signalling the end of mortgage interest tax relief for personal landlords.

Instead of being able to offset 100% of your mortgage interest costs from your taxable income, landlords can now only claim a 20% tax credit instead. 

Many landlords are now turning to limited company incorporation as a workaround. Limited companies still have access to 100% mortgage interest tax relief.

Plus, company income is taxed at 19%; whereas personal income tax can be charged at marginal rates of up to 45% depending on your level of income.

So, is limited company incorporation the cheaper route?

Well, it depends. Let’s go back to those marginal income tax rates.

If your income puts you in the higher rate or additional rate brackets – 40% and 45% respectively – then limited company property ownership might be the more profitable option.

But if your income is £50,270 or less, you’ll only be paying income at the basic rate of 20%; which means your tax costs will be neutralised by that 20% tax credit.

Plus there’s the actual mortgage interest rates to consider. While limited company mortgage rates are becoming more and more comparable to standard mortgages, the interest rates for individual landlords are still lower.

So, if you’re a basic rate taxpayer, you’re probably best off ignoring limited company incorporation and remaining as an independent landlord instead.

But if you’re a higher rate or additional rate taxpayer, you’ll want to read our next myth…

Myth #3: You need a limited company structure to make money from property investment

Not necessarily.

It’s true that property investment has become more expensive in recent years; with the introduction of Section 24 tax rules signalling the end of mortgage interest tax relief for personal landlords.

Instead of being able to offset 100% of your mortgage interest costs from your taxable income, landlords can now only claim a 20% tax credit instead. 

Many landlords are now turning to limited company incorporation as a workaround. Limited companies still have access to 100% mortgage interest tax relief.

Plus, company income is taxed at 19%; whereas personal income tax can be charged at marginal rates of up to 45% depending on your level of income.

So, is limited company incorporation the cheaper route?

Well, it depends. Let’s go back to those marginal income tax rates.

If your income puts you in the higher rate or additional rate brackets – 40% and 45% respectively – then limited company property ownership might be the more profitable option.

But if your income is £50,270 or less, you’ll only be paying income at the basic rate of 20%; which means your tax costs will be neutralised by that 20% tax credit.

Plus there’s the actual mortgage interest rates to consider. While limited company mortgage rates are becoming more and more comparable to standard mortgages, the interest rates for individual landlords are still lower.

So, if you’re a basic rate taxpayer, you’re probably best off ignoring limited company incorporation and remaining as an independent landlord instead.

But if you’re a higher rate or additional rate taxpayer, you’ll want to read our next myth…

Myth #5: a limited company structure is difficult to manage

When people hear the words ‘limited company’, they often picture a dedicated office and a full team of employees; with all the overhead costs and extra paperwork that comes with them.

In reality, the process of managing a limited company for property investment is almost identical to managing your own property investment portfolio as an individual. 

The limited company – known in this scenario as a ‘special purpose vehicle’ or SPV – is effectively just a legal entity that owns the property portfolio on your behalf.

Setting up a limited company SPV is quick and straightforward. You can actually do it all online via the myriad of company formation services on the net; including registering at Companies House and HMRC, and setting up a separate business bank account.

You’ll likely need to arrange insurance cover for the new company yourself, but many formation agents can refer you to their preferred insurers.

As for the day-to-day management of the limited company, there are a few extra hoops to jump through – namely keeping up-to-date financial records and keeping track of your tax liabilities – but these are things that you can delegate to a trusted accountant and tax advisor.

Need help separating property tax fact from fiction?

With more than 30 years of property tax advisory and accounting expertise, the specialists at GNS Associates can offer effective routes of tax mitigation that will help your investment business thrive.

Our team knows the tax planning strategies that work; and the ones that don’t. Together, we’ll help you keep rental profits high and your tax bills low; without compromising on compliance with HMRC.

Book your free, no-obligation 30min consultation with us today; call GNS Associates on 0208 090 2604 or email our team at info@gnsassociates.co.uk.