Can rental profit become ‘earned’ income?

by Readers Question

10:37 AM, 20th July 2015
About 3 years ago

Can rental profit become ‘earned’ income?

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Can rental profit become ‘earned’ income?

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.wine

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.



Comments

Neil Patterson

10:40 AM, 20th July 2015
About 3 years ago

Hi Jo,

I have spoken to a few readers with larger portfolios who have set up their own letting agencies often in partners names to tax advantage of spreading tax liabilities.

David Price

19:44 PM, 20th July 2015
About 3 years ago

I manage my 50 plus properties through a Limited company but it is not a letting agency and the company has no assets. Would be happy to discuss tactics if you contact me through Property118.

Ian Ringrose

23:37 PM, 20th July 2015
About 3 years ago

To keep HMRC happy you should also manage some properties you don't own and charge yourself the going rate (e.g. 10% plus tenant find etc.)

However be-careful with finance, some lenders don't like property related income even when it is earned.

Also the changed to income tax on divs makes it less of a good option then it was before the budget.

Gary Nock

16:03 PM, 21st July 2015
About 3 years ago

Ian, been there, tried that. If you own your portfolio and then set up a letting agency as a sole trader HMRC will not let you charge yourself to manage your own properties. If you set up a limited company then this is possible although as you say you will need to manage other properties as well.

Ian Ringrose

17:08 PM, 21st July 2015
About 3 years ago

Gary, I was assuming a LTD as clearly you need a legal identity that is different from yourself.

Richard Connell

14:58 PM, 24th July 2015
About 3 years ago

Forgive my naivety but if you had a LTD company to manage your portfolio, surely as in example above you would be above VAT limit and your LTD would have to charge yourself VAT, creating extra expense? (assuming any rent taken in to LTD counts as turnover).

Gary Nock

23:22 PM, 24th July 2015
About 3 years ago

Ltd companies only have to be VAT registered if the goods supplied (i.e a management service) exceed £82,000 in any year. It is not the turnover that determines VAT but the value of the goods charged out.

Jim S

9:34 AM, 25th July 2015
About 3 years ago

Hi Gary,
So to be clear are you saying that its only the 10% management fee bit that goes towards the VAT threshold of £82k
ie up to £820,000 of rental management can take place (10% of £820k = £82k) before having to register for VAT.
Because if so that's VERY interesting to me!

robert gillies

10:43 AM, 25th July 2015
About 3 years ago

Reply to the comment left by "David Price" at "20/07/2015 - 19:44":

David
I would love to view your tactics on setting up a ltd company to manage my properties, but your profile does not have an email address.

David Price

11:28 AM, 25th July 2015
About 3 years ago

Reply to the comment left by "robert gillies" at "25/07/2015 - 10:43":

Can't find a facility to add an email address to my profile so I will contact anyone who asks.

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