Changing the way your buy-to-let profits are taxed
If you have a buy-to-let (BTL) property in the UK, you would have by now seen your profits dwindle with the restrictions in tax relief on your mortgage interest. But it possible to pay less tax?
We have two options to consider below:
1. Sharing spousal income
Do you have a spouse that has no income, or is a basic rate taxpayer (Assuming you are a higher rate taxpayer)?
If your partner is not already on the deed and you own 100% of the property, the first step is to either get their name on the deed (Note this has capital gains and inheritance tax implications as it is a change of legal ownership) or to have a deed of trust set up by a solicitor (This transfers beneficial ownership of the property).
You will then need to submit Form 17 if you would like to split the income with your partner in a ratio other than 50/50.
If your partner is already on the deed, but you would like to have them receive more than 50% of the income from the property, you will need to ensure that the land registry shows you are tenants in common and not joint tenants. You will then need to submit Form 17.
Please note, you will need to employ the services of a solicitor to help you with these changes.
2. Changing to a Furnished Holiday Let
For your rental income from a property to qualify as furnished holiday lettings (FHLs) there are important conditions to be met:
- Your property must be in the UK or the EEA
- The property must be commercially let (you must intend to make a profit)
- Your property must be sufficiently furnished for normal occupancy
- The property must be available to be let for 210 days and must actually be let for 105 days in (broadly) a tax year
- You cannot count days let to friends or relatives at a reduced rate
- You cannot count lets that exceed 31 days
If you do not let your property for at least 105 days, then a ‘period of grace’ election is possible for up to two years only — i.e. you can stamp a bad year with an immediately preceding good year.
Of course, an FHL is much more work than a BTL property — the key is that the property is let for short periods which requires more admin than letting on an annual basis — but it is important to consider the tax advantages.
If you qualify for FHLs:
- You can deduct all of the interest you pay on your mortgage
- You can claim capital allowances on plant and machinery for items such as furniture, fixtures and equipment
- Your profits will count as earnings for pension purposes (Contribution levels)
- You can claim Capital Gains Tax relief for traders
See HMRC Helpsheet 253 for more information
