How to reduce income tax on rental property
There are a number of different ways to reduce income tax on rental property and these include:
1. Assign beneficial interest to use the tax allowance of your spouse using a Form 17
2. Transfer the buy to let into a Limited Company
3. Offset allowable expenses to reduce tax bill on rental income
4. Carry over losses from previous years
5. Transfer buy to let from a partnership to a Limited Company
Whilst you can reduce income tax on rental property, it may end up costing you more in the long run, as you trigger other taxes such as Stamp Duty Land Tax and Capital Gains Tax. We explain in more detail how to reduce income tax on rental property for each of the above and flag potential issues around other taxes that could arise.
How do you pay income tax on rental income?
- You need to declare your rental income in your end of year tax return, for the year from the 6th April to the 5th April.
- Your tax return must be filed online, no later than the 31st January following the 5th April - so you get 9 months to file your accounts.
- You pay an on account tax payment on the 31st July and the balance must be paid in full by the 31st January after you've filed your tax return for the year.
- If you share the beneficial interest with someone else, then you only declare your share of the rental income in your personal tax return.
- You share property income in proportion to your beneficial interest in the property and this should be declared within a deed of trust or deed of assignment.
- You are liable to pay tax on rental income on the day it is received. If the rent is due on the 31st March but received into your bank on the 6th April, then it falls into next year's tax year for paying tax even though it was due in the previous tax year.
- Get up-to-date property tax advice on SDLT, CGT, IHT, Personal versus partnership versus company structures
- Free 15-minute initial consultation with a qualified accountant from our panel of tax advisors
- Ask your tax questions and get guidance on what you can do next
- If there is some further accountancy work required, then you'll be quoted for this as a separate piece of work with no obligation to purchase
How to reduce income tax on rental property by:
- 1Transfer beneficial interest to your spouse
It is very common practice to transfer the beneficial interest in the property to your partner, so that you can benefit from their tax free allowance and lower tax bracket. You'll also benefit from sharing their capital gains tax allowance on disposal (whilst this is still available to offset).
You can share beneficial interest in any share you choose whether it be 100%/1%, 50%/50% even 80%/20%. You do not need to be a legal owner in order to be a beneficial owner. Read more - Beneficial Ownership vs Legal Ownership.
The actual way you share beneficial interest can be done in many different ways, such as:
- Transfer of equity and draft a deed. The legal owner adds someone on the legal title and they agree how they share the beneficial interest and record this in a deed of trust. If there is a mortgage, you'll need to obtain their consent to add the new party to the title and if the mortgage debt is more than £40,000, then SDLT may be payable as consideration for the transfer. Read more - What is the Transfer of Equity Process?
- Draft a deed of assignment. Where you don't want to add the name of the party to the legal title, but want to share the rental income with them, you can draft a Deed of Assignment which assigns the beneficial interest to them and as such the rental income. In most cases, lender consent isn't required, however, read your mortgage terms and conditions to check. There is no Stamp Duty if there is no consideration. Read more - Deed of Assignment for assigning beneficial interest in property.
- Sever Joint Tenancy and draft a deed of assignment. Where you are already a joint legal owner, but the property is held as Joint Tenants, you must first sever the joint tenancy and register as tenants in common, so you can then share the rental income in unequal shares. As Joint Tenants, you own rental income 100% together, so declare 50/50 in your tax return. As tenants in common, you can share in any proportion you choose. Stamp Duty Land Tax may be payable if there is a mortgage of £40,000 or more. Read more - How to sever a joint tenancy.
Assigning part of the beneficial interest to your spouse is how to reduce capital gains on sale of rental property, however, if you are married, then you should file a Form 17 to HMRC to confirm how you share the rental income.
Free initial advice on how our deeds can work for you
- severing joint tenancy to register as tenants in common, or vice versa
- buying with your unmarried partner, to protect your shares in case the relationship breaks down
- married or civil partners, let a property, and one of you is on a lower tax bracket
- buying with friends or family, so you can protect shares based on the initial and ongoing contributions from each party
- going to invest significant money in unequal shares, into improvements or renovations on the property
- buying a property with a mortgage, where one or more of the borrowers will not be a legal proprietor
- unable to buy the other owner out and want to surrender your share
- Transfer Beneficial Interest Where you transfer beneficial interest (known as a Transfer of Equity) in property, you have to pay Stamp Duty Land Tax on the consideration, which could be money changing hands or the mortgage debt on the title. Read more - What stamp duty is payable when you transfer equity?
- Transfer to Company Transferring property from yourself to a company attracts stamp duty at full market value and second home stamp duty. Read more - What stamp duty is payable when you transfer property into a company?
- Capital Gains Tax on the Disposal If you dispose of an interest in a property that isn't your Principal Place of Residence, then Capital Gains Tax could be payable. Read more - Capital Gains Tax on Gifted Property and Capital Gains Tax on Property for Married Couples.
- 2Transfer the buy to let into a Limited Company
Since 2022 you are no longer allowed to offset mortgage repayments from the income on the rental property, which means you pay more income tax. A company on the other hand can deduct mortgage repayments from the rental income, so you pay Corporation Tax on the net profit. You can also deduct other property costs to reduce the net profit further.
Once you've paid your Corporation Tax, you can then distribute the profit after tax as dividends, which attract a lower tax than rental income.
Stamp Duty Land Tax is payable if there is any consideration and you will be liable for the Capital Gains Tax due on disposal of the asset to the company.
- 3Offset allowable expenses to reduce tax bill on rental income
Even though you can't deduct the full amount of the mortgage repayments from the rental income, you are allowed to deduct other rental property expenses such as:
- Mortgage interest
- Repairs to the property, such as plumbing/boiler and electrics
- Rates such as water or council tax
- Managing agent fees
A full list of allowable expenses to reduce the tax on rental income is set out here - HMRC - Allowable expenses.
What rate of income tax do you pay on rental income?
The income tax bands on work and rental income are as follows:
| Tax Band | Taxable Income (Employment and Property) | Tax Rate |
|---|---|---|
| Tax Band Tax free allowance | Taxable Income (Employment and Property) £12,570 | Tax Rate 0% |
| Tax Band Higher rate | Taxable Income (Employment and Property) £50,271 to £150,000 | Tax Rate 40% |
| Tax Band Additional rate | Taxable Income (Employment and Property) over £150,000 | Tax Rate 45% |
Source: HMRC - Income Tax Rates
- 4Carry over losses from previous years
If in any tax year the outgoings are more than the rental income, such as having an empty flat or if you need to do large repair works, then the losses from that year can be used to reduce any profit made the next year.
- 5Transfer buy to let from a partnership to a Limited Company
Where you currently own a property in a Partnership and it is run as a business, not an investment, then you are able to transfer the property into a limited company and not pay any Stamp Duty Land Tax. Read more - How do I transfer a partnership to a limited company with no SDLT?
Before looking to minimise tax on rental income by transferring your property into a partnership you should obtain accountant advice.
Do you need help reducing the income tax on your rental property?
We can help with this, whether it's by drafting a deed or transferring the property into a limited company. A SAM advisor will talk you through your options and guide you throughout the entire process.
Caragh is an excellent writer in her own right as well as an accomplished copy editor for both fiction and non-fiction books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey and mortgage related articles.
