Owning rental property in the UK can be a great way to earn extra income and build wealth over time. However, many landlords find that taxes can significantly eat into their profits. Fortunately, there are several legal strategies that landlords can use to reduce their tax liabilities and keep more of their hard-earned money. In this article, we’ll explore some proven approaches to help UK landlords cut their tax bills while staying fully compliant with the law.
1. Make Use of Allowable Expenses
One of the simplest and most effective ways to reduce your tax bill as a landlord is to claim allowable expenses. Allowable expenses are costs that you incur wholly and exclusively for the purpose of renting out your property. These expenses can be deducted from your rental income, reducing the amount of income on which you must pay tax.
Common allowable expenses include property maintenance and repairs, letting agent fees, accountant fees, insurance, and even travel costs related to managing your rental property. It’s important to keep detailed records of all expenses and retain receipts as proof. By maximising your allowable expenses, you can lower your taxable income and, consequently, your tax bill.
2. Take Advantage of Mortgage Interest Tax Relief
If you have a mortgage on your rental property, you can benefit from mortgage interest tax relief. Although changes to this relief mean you can no longer deduct all of your mortgage interest costs from your rental income, you can still claim a 20% tax credit on your mortgage interest payments. For basic-rate taxpayers, this can effectively offset the tax liability, but higher-rate taxpayers may need to explore other strategies.
Another approach to consider is switching to a limited company structure. This is particularly beneficial for landlords with multiple properties. Operating as a limited company allows you to deduct mortgage interest as a business expense, which can significantly reduce your tax bill. Many landlords find that this is one of the proven approaches to minimise landlord taxes in the UK, especially if they are in the higher income tax brackets.
3. Use the Rent-a-Room Scheme
If you rent out a furnished room in your home, you can take advantage of the Rent-a-Room Scheme. This scheme allows you to earn up to £7,500 per year tax-free. If you share the income with someone else, such as a spouse, you can each claim up to £3,750. The Rent-a-Room Scheme is a great way to generate additional income while keeping your tax bill low.
4. Claim Capital Gains Tax (CGT) Reliefs
When you sell a rental property, you may be liable for Capital Gains Tax (CGT) on the profit you make. However, there are reliefs available to help reduce this tax burden. Principal Private Residence (PPR) relief, for example, applies if the property was your main residence at some point. Letting Relief can also help if you once lived in the property and then let it out.
To further minimise CGT, consider timing the sale of your property strategically. Utilising your annual CGT allowance, currently £6,000 (2024-25), can also help reduce the amount of gain that is taxable.
5. Split Income with a Spouse or Partner
For married couples or civil partners, transferring ownership of the property to the lower-earning partner can be a smart tax-saving strategy. This approach can help make the most of personal allowances and lower tax bands, potentially reducing the overall tax liability on rental income. It’s important to handle this process correctly, so seeking advice from a tax professional is highly recommended.
6. Consider Using a Limited Company Structure
As mentioned earlier, switching to a limited company structure can offer significant tax advantages for landlords, particularly those with multiple properties. When you own property through a company, rental profits are subject to corporation tax (currently 19%) rather than personal income tax rates, which can be as high as 45%. Additionally, you can withdraw profits through dividends, which may be more tax-efficient, especially with proper planning.
7. Invest in Energy Efficiency Improvements
The UK government offers incentives for landlords who improve the energy efficiency of their rental properties. Making upgrades such as installing insulation, double glazing, or energy-efficient heating systems not only makes your property more attractive to tenants but can also qualify you for tax relief. These improvements may be deductible as allowable expenses, helping to reduce your taxable income.
Final Thoughts
Reducing your tax bill as a UK landlord is all about smart planning and taking full advantage of the available reliefs and deductions. By keeping detailed records, understanding which expenses are allowable, and considering the benefits of a limited company structure, you can legally minimise your tax liabilities. Before making any significant changes, it’s always wise to consult with a tax professional to ensure compliance with tax laws and to create the most effective tax strategy for your unique situation. By implementing these proven approaches, you can maximise your rental income and achieve greater financial success as a landlord in the UK.
