Is your property business tax-efficient?

Running a property business is undeniably rewarding, yet it comes with its fair share of complexities, especially when it comes to taxes.

Being tax-efficient is not just about staying compliant; it's about understanding and harnessing the various tax implications to bolster profitability and stability in your business. From income tax to VAT, each tax has its own set of rules and can significantly affect your bottom line. Moreover, the structure of your business can play a pivotal role in how these taxes apply.

Furnished Holiday Letting

The Furnished Holiday Lettings (FHL) regime is due to be abolished from April 2025.

The change, according to the Chancellor Jeremy Hunt, aims to increase long-term rental options for locals and raise tax receipts to help fund national insurance cuts. It is estimated that the change will raise around £300m from landlords who benefited from the furnished holiday lettings (FHL) scheme.

Properties meeting the qualifying tests for FHLs are, however, currently taxed under special rules and owners of such properties can access specific tax advantages not available for other lettings, including:

• Entitlement to plant and machinery allowances on items of fixtures, furniture, furnishings and equipment. The relief also allowed utilisation of the 100% annual investment allowance.

• Capital gains tax (CGT) reliefs for traders such as rollover relief and mitigating CGT on disposal of a property.

• Finance and interest restrictions did not apply to loans and mortgages on FHL properties. The new measures will have far-reaching consequences for owners who have let their properties for holiday rental income and met the criteria set out in the FHL regime. It includes those who might own a single holiday home made available for letting or those who let their properties through Airbnb or similar agencies.

Income Tax & Corporation Tax

If you operate as a sole trader or in a business partnership, income tax is payable on your rental income. The income tax rates you pay will depend on your income bracket, ranging from 20% for basic-rate taxpayers to 40% or 45% for higher earners. Deductions are allowed for certain expenses and allowances, which can reduce your taxable profit.

On the other hand, if your property business is set up as a limited company, its profits are subject to corporation tax. The current rate stands at 19% for profits up to £50,000 and then rises for profits above this.

Operating through a limited company can potentially offer benefits like lower tax rates and more opportunities for tax planning, but SDLT and CGT implications of transferring personal assets to a company need to be weighed up against this and it also comes with additional reporting and management responsibilities.

Capital gains tax

When you sell or a property that has increased in value, capital gains tax (CGT) comes into play. The rate depends on your overall income and the nature of the asset but is usually set at 18% or 28% for residential properties. The higher capital gains tax (CGT) rate on residential property will, however, reduce from 28% to 24% next year following the Spring Budget 2024.

Not all property sales will incur a CGT charge. Private residence relief, for example, means you do not pay CGT when selling your main residence in most situations. Furthermore, for the 2023/24 tax year, each individual has a tax-free allowance of £6,000 – although this is halving to £3,000 for sales in 2024/25.

Planning ahead is therefore essential to minimise your overall tax bill.

Stamp duty land tax

Stamp duty land tax (SDLT) is charged on most property purchases. The tax rate varies based on the property's value and whether it's residential or non-residential.

There are also additional charges for second homes and buy-to-let properties. Properly planning and timing your property purchases can help minimise the impact of SDLT on your investments. A stamp duty tax break when purchasing multiple properties in England or Northern Ireland is due to end in June.

VAT

VAT can be particularly complex in the property sector. The standard VAT rate is 20%, but certain property transactions are subject to the reduced rate of 5%, exempt or even zero-rated.

Understanding the VAT implications of your construction, renovation, or property transactions is crucial to ensure you are charging the correct rates and taking advantage of potential savings.

Structuring your business

The way you structure your property business can significantly impact your total liabilities. Sole traders, partnerships and limited companies each have their own tax implications to consider.

For instance, a limited company might offer tax-saving opportunities but comes with more extensive compliance and reporting requirements. Additionally, holding properties in a special purpose vehicle (SPV) can be advantageous for loan applications and can provide a clear separation of assets for tax purposes.

Your business’s ownership structure is also worth considering, especially if you're working with partners or investors. Opting for joint ownership or setting up a trust can impact how your profits are distributed and taxed.

A proactive approach is key

Being tax-efficient is not a one-time exercise but an ongoing process of staying informed, planning ahead, and seeking professional advice. Tax laws and rates are often subject to change, and each property transaction presents unique opportunities and challenges.

Expert tax advisers and accountants who understand the property sector, such as Richardson Swift, can provide tailored advice and ensure that your business not only remains compliant but also maximises its tax efficiency.

We understand that tax considerations are crucial for property business owners – but they should be part of a broader strategy that considers your property business's overall growth and stability. A holistic approach, combining tax efficiency with solid market analysis and business planning, is the most effective way to ensure long-term success.