The tax benefits of owning a rental property business in the UK have become less and less attractive over the last number of years. That being said, there are still a few simple tax planning techniques you can use to help mitigate the tax bill when it comes to owning a rental property.
One basic technique landlords could use, if they are married (or in a civil partnership), is shifting otherwise taxable profits from a rental property (or any number of properties) to the spouse who is a lower marginal rate taxpayer than the other spouse. This can be achieved by filing Form 14 with HMRC to declare a variation of the split of income and expenses to the actual share of ownership.
For example, if one spouse is a higher rate taxpayer, and their spouse is a non-taxpayer, then it would make more sense to make this election and shift 99% of the net taxable profits to the non-taxpaying spouse and keep the 1% in the higher rate taxpayer’s name.
Something to bear in mind is that transferring a property to a third-party usually incurs a capital gains tax charge at a higher 18%/28% capital gains tax rate – as opposed to the usual 10%/20%. However, the only exception to this tax on transfer rule is transfers between spouses under the inter-spousal exemption. Inter-spousal transfers occur on a ‘no gain, no loss’ basis, which in short means, a spouse inherits the same base cost as the other spouse at the time of acquisition of the property. Therefore, transfers of rental properties between spouses can occur without any consideration to capital gains tax.
