Some Private Landlords Will Pay More Income Tax Than They Make In Profit

Some Private Landlords Will Pay More Income Tax Than They Make In Profit

23:08 PM, 21st October 2022, About A year ago

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Is it any wonder that so many landlords are selling some of their properties to pay down debt at the same time as restructuring the ownership of their rental property businesses?

At the foot of this article, I have shared a fantastic video interview where two Letting Agents from Christopher Shaw Residential Lettings interview Alex Norian, Managing Director of IWN Accountancy and Property118 Landlord Tax Consultant. The purpose of the video was for Christopher Shaw to educate their own landlord Clients. However, it is so good I feel it needs to be watched by all landlords and their professional advisers. It may also be worth mentioning that Alex is looking to build a network of landlord-facing businesses to record and share video’s of this nature with in order to cross-promote and educate as many landlords and associated professional advisers as possible. To contact Alex or his wife Steff (pictured right) click here. They work as a Team, one qualified in tax and the other in law they make quite a formidable team.

Meanwhile, if you’re a numbers type of person I think you might appreciate the following worked example of the real-life problems and solutions of a married couple operating a residential rental business Partnership. Recent increases in interest rates could very easily have ruined them, but thankfully Property118 was able to help. Here are the numbers: –

£300,000 a year rental income

£200,000 a year in finance costs (was £61,000in 2021)

£75,000 a year for maintenance and other expenses

£25,000 a year profit (was £164,000 in 2021)

£80,549.25 income tax

£40,000 tax credit (20% of finance costs)

£40,549.25 tax payable

£15,549.25 out of pocket after tax – OUCH!

This example is not even based on a highly geared property portfolio!

This couple own £6,000,000 of rental properties producing an average yield of 5%

Mortgages are £3,076,923 so the LTV is 51.28%

The mortgage interest rate used in this example is 6.5%, previously 2% for the 2021 numbers.

After their tax Consultation with Property118

By selling their business at market value to a Limited Company in exchange for shares this husband and wife couple now have an opportunity to pay no income tax whatsoever if they just take the same £25,000 a year of income. However, they are also in a position to sell rental properties without paying any Capital Gains Tax at all.  The business sale occurs in line with legislation providing rollover relief from Capital Gains Tax, no Stamp Duty and the need to arrange new financing can also be negated by using indemnities.

If they subsequently sell 50% of their properties and use the net sale proceeds to pay down their mortgages the outcome will be as follows: –

£3,000,000 property values

£76,923 Mortgages

£150,000 a year Rental income

£5,000 a year finance costs

£37,500 a year maintenance and other expenses

£107,000 a year profit

They will still pay some tax on this profit, but definitely, no more than they would pay if they were earning the same amount of money from any other profession and potentially a LOT less.

As a result of booking a Landlord Tax Planning Consultation with Property118 they and their Accountants received a 28-page report and recommendations explaining step-by-step how the restructure works and with links to all the relevant HMRC manuals for their Accountants to double-check for them. This was delivered following numerous emails and calls with their Property118 Consultant. They also received a bespoke one-hour presentation summarizing the costs and benefits of the recommendations via a Zoom meeting with their Property118 Tax Consultant. This was then followed up a week later with a further Q&A session over Zoom with Property118 and their Accountants. These Zoom sessions were recorded and shared with them to watch again whenever they wish. Their report from Property118 also included a quotation from Cotswold Barristers for all the legal work required to implement the recommendations. Best of all, everything mentioned above was covered by the £400 fixed Consultation fee, save for the costs of implementing the advice of course.

Now here’s that amazing video I promised you …

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  • For the avoidance of doubt, we are able to assist landlords who own properties in England, Northern Ireland, Scotland and Wales. Where you reside is not a problem, even if you are resident outside the UK.
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