Can rental profit become ‘earned’ income?Make Text Bigger
I was wondering about the pros and cons of setting up a property management or lettings business to run my portfolio through. This is partly because of the proposed tax changes to mortgage interest and partly because I currently don’t fit the criteria for certain finance and insurance products as my income is deemed to be unearned. The ability to remortgage in about 2 or 3 years time is important to us.
I solely own or jointly own 10 rental properties, all of which have mortgages. My husband solely owns an additional property.
In total our combined rental receipts are just under £200000. The profit varies from year to year but we are both 40% tax payers.
In reality I do virtually all of the work, except stuff I pay plumbers and electricians to do.
My husband has a job (on a casual hours contract) and has the option of paying into a pension scheme, which would presumably minimize the proposed tax changes for him.
As my income is deemed to be unearned I guess I can only pay £3600 into a pension.
My thought was to set up a property management company and be employed by it.
Previously (before the budget) I have encountered some negativity to this idea from my accountant mainly on the grounds that it was a pointless exercise from a tax point of view and expensive because of NI. He’s never taken into account the lending criteria of mortgage companies regarding earned or unearned income.
Would it need to be a company or would being a sole trader have the same effect? What’s the difference?
Could my proposed property management business charge my portfolio a 10% or 15% fee for tenant find and general maintainance or is there a reason HMRC would object to that? Is it OK for me to pay myself to perform services for me (at a commercial rate)?
Would it make that chunk of income earned rather than unearned?
If it was at 15% (so just under £30000) would this satisfy the earnings criteria of various mortgage lenders? I guess business expenses would be a bit but I should be able to pay myself around £25000. National insurance is possibly an issue. Would I be able to pay most of the £25000 into a pension? Would that be beneficial?
I’ve never really thought about pensions as I had always assumed my houses were performing that function. Now I’m wondering if I should change my thinking.
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