Firstly, it is important to claim allowable expenses as a deduction against rental income received, our ‘First time landlord’ article discusses these. 

There are further tax savings that could then be made, for example if you own rental property jointly with a spouse or civil partner marriage allowance could be beneficial. 

Marriage Allowance can work for couples where one person is earning less than the personal allowance, which is set at £12,570 from April 2021, and the other person pays income tax at the basic rate, which from April 2021 usually means their income is between £12,571 and £50,270. The marriage allowance currently stands at £1,260. This means the potential tax saving from the higher tax earner’s bill is up to £252.

You can backdate your claim to include any tax year since 5 April 2017 that you were eligible for Marriage Allowance. Your partner’s tax bill will be reduced depending on the Personal Allowance rate for the years you are backdating. When you transfer some of your Personal Allowance to your spouse or civil partner you might have to pay more tax yourself, but you could still pay less as a couple. 

If you own rental property jointly, an option could be to set up a business partnership. Business partners share responsibility for any losses the business makes, any bills the business incurs, and the profits from the business; each partner only pays tax on their share. Setting up a partnership means that you could avoid one person moving into the higher rate for income tax. 

You can trade as a business partnership in your own names or chose another name for the business. You will also need to choose a ‘nominated partner’ who will be responsible for registering the partnership for Self Assessment with HMRC and submitting the tax return for the business. Members of a partnership must also be individually registered for Self Assessment with HMRC and all partners must send their own Self Assessment tax returns and pay income tax. 

Another option, where you are likely to be paying higher rate income tax, could be to set up a private limited company. Private limited companies are legally separate from the people who run them, have separate finances from the people who run them, has shares and shareholders, and can keep any profits it makes after paying corporation tax. 

The advantage of a private limited company is that you can pay yourself a salary within the basic rate of income tax, if available, and potentially have your partner claim Marriage Allowance, or pay your partner a separate salary. Company profits can also be paid as dividends to people with a share in the company. A company can be used to plan your personal income levels and ensure tax efficiency on income taken from the company. 

The disadvantage is that it takes more work and time to set up a private limited company than a partnership. You’ll need to choose a company name and registered address, appoint directors and a company secretary, establish and issue at least one share, and draw up a memorandum and articles of association which set the rules for running the company. 

Whether you are looking to rent out your second home or expanding your existing portfolio, we can make sure you get the most out of your property. Contact me for an informal discussion on how we can help.