Can rental profit become ‘earned’ income?

by Readers Question

10:37 AM, 20th July 2015
About 4 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

Ian Ringrose

18:50 PM, 25th July 2015
About 4 years ago

An agent does not charge the tenant rent, they collect rent on behalf of the landlord. They charge the landlord for doing so.

This is key to understanding how vat works for agents; the vat is on the charges the agent makes, not on the rent they collect on behalf of the landlord.

(Unless the agent is also the landlord, hence using a LTD for the agent if you own properties yourself. Most rent is also exempt (not 0 rated) from vat.)

Gary Nock

22:19 PM, 25th July 2015
About 4 years ago

Reply to the comment left by "Jim S" at "25/07/2015 - 09:34":

Jim I think Ian has also commented on this and I concur. Letting Agents only charge VAT on their management fee. So until the sum total of chargeable product reaches 82k then there is no need to register for VAT. This is different to a factory that makes widgets. They buy in raw materials and turn it into a widget and then charge VAT on the input and output cost so it then becomes more like the factory turnover figure. If this makes sense.

robert gillies

15:44 PM, 19th February 2016
About 4 years ago

David Price, I have now set up a Ltd company. The company will own a couple of houses, and I am considering using the company to manage my personal properties too.

Could you contact me at robertgillies@btinternet.com to discuss any pitfalls to avoid, or give me any tips.

Thanks

Paul Mahoney

21:29 PM, 19th February 2016
About 4 years ago

We advise on all aspects of property investment inc tax, finance, sourcing and management and would be happy to discuss how we can help.
Contact me at the link; http://www.property118.com/member/?id=7077

money manager

23:50 PM, 19th February 2016
About 4 years ago

It's what we are considering with possibly a partnership on the front end to split property profit (as defined by GO). There is also no reason why the company cannot then sub contract for some specific skills orctrades such as painting or decoratting. Direct property pfofits/losses are ringfenced abd so self employed activities such as that will becsubject to CI/C4 NI although it may be possible to significantly reduce any NI burden by splitting/incorporation by charge/sub contrscting as described.

Puzzler

8:52 AM, 20th February 2016
About 4 years ago

As you describe it above, then no, HMRC would not wear it as the charge you propose is above the market rate and it is clearly a vehicle designed to evade tax. You cannot pay yourself for managing our own properties. However with all the schemes coming out of the woodwork and the forthcoming changes, go back to your accountant and see if he has changed his mind.

Gary Nock

9:38 AM, 20th February 2016
About 4 years ago

Agreed. The only way to charge yourself for letting is as a limited company. The letting fees become part of the companies income. You can pay yourself or a partner or both £10,800 per annum before you pay tax, dependent upon other personal income. The wage bill comes off your profits which are then taxed as corporation tax.

Puzzler

9:51 AM, 20th February 2016
About 4 years ago

That is true, but you would have to justify that the amount you pay yourself is commensurate with the work done. i.e. in line with employing an agent rather than doing it yourself.

There is currently no nil rate band on Corp Tax so you would need to do the sums to see if it is worthwhile

Paul Mahoney

10:01 AM, 20th February 2016
About 4 years ago

a limited company also allows you to divert some income to your children for school fees which is tax free
If anyone wants more info on this please get in touch

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