Year end tax planning for residential landlords

With the end of the financial year approaching, now is a good time for residential landlords to review their tax affairs.

Highlighted below are areas to review before 5 April 2024.

Refurbishments - If you are planning refurbishments, you may want to deliberately choose whether you want relief in either the current tax year or next tax year. If you bring forward planned refurbishment costs, you may obtain tax relief in the 2023/24 tax year rather than the following year.

Sharing property Income - You should consider whether property is more tax efficient owned jointly, perhaps with a taxpayer who pays tax at a lower tax rate than you.

Furnished holiday let (FHL) - The government has announced in the Spring budget, that they intend to abolish the FHL regime from 6 April 2025. 

The FHL regime currently benefits from various tax reliefs which are generally not available to property rental businesses, such as:

• interest on loan can be deducted in full
• income from FHLs qualifies as earnings for pension purposes
• relief is available for capital expenditure in respect of furniture, fixtures and equipment
• various capital gain tax reliefs are available on disposals of FHLs (including business asset disposal relief).

Landlords should review the status of their properties prior to the end of the tax year, to see if there are any reasonable steps, they can take to meet the FHL status for the 2023/24 tax year.

Landlords of FHL’s should consider the prospect of disposing of their properties prior to 5 April 2025. They can then still benefit from capital gains tax rates of 10% as opposed to the higher rates for non-qualifying properties (18% basic rate band / 28% higher rate band, dropping to 24% from 6 April 2024).

Rent a Room Scheme - Tax relief of up to £7,500 for the 2023/24 tax year can be claimed where an individual rents out a room in their main residence.

Property income allowance - The tax-free property allowance of £1,000 can be claimed instead of deducting rental expenses if this is more beneficial.

Multiple Dwelling Relief (MDR) - MDR is a relief that reduces the amount of Stamp Duty payable when purchasing more than one dwelling in a single transaction. The relief operates by averaging the value of the properties for Stamp Duty purposes, rather than taxing an individual on the combined total purchase price.

It was announced in the Spring Budget that MDR is to be scrapped from 1 June 2024. Therefore, for individuals who may be intending to benefit from the regime, the window to do so is closing.

Pension contributions - Making pension contributions can be an effective pre-year end planning tool to decrease the year’s income tax payable. For some with income over £100,000, they are also able to recoup their personal allowance, giving relief up to 60%.

Charitable donations - Making charitable donations can also be an effective pre-year end planning tool to decrease the years income tax payable.

Income tax rate changes - The income level at which the additional rate of tax (45%) applies changed from 6 April 2023, so it now starts at £125,140 rather than £150,000. It is worth considering whether this change has impacted you and if you need to be taking any action to reduce its impact.

You may also wish to consider bringing forward the payment of income ahead of 6 April 2024, if you anticipate your income to increase in the next year.

Holding property in a family investment company - The restriction in the loan interest relief for income tax purposes has meant, to remain financially viable, some landlords have used companies to hold rental property. This has a number of benefits including a lower rate of tax on rental profits. You should review whether a company could be right for you. More detail can be found here: Family Investment Companies.

Future Capital Gains Tax rate changes - The capital gains tax annual exemption is decreasing from £6,000 to £3,000 from 6 April 2024. You may consider accelerating the disposal of chargeable assets before the reduction to the annual exemption.

Following the 2024 Spring Budget, the higher rate of CGT on residential property gains will be reduced from 6 April 2024 from 28% to 24%. The lower rate will remain at 18%. You may therefore wish to consider delaying the disposal of a residential property to past 6 April 2024.

Corporate Landlords

Dividend tax - Should you take a dividend in the current tax year, or should you defer it until next year? Using up this year’s tax bands and allowances should be reviewed as it may be more tax efficient.

The dividend tax-free allowance will be decreasing from £1,000 to £500 from 6 April 2024.

How can we help?

We can help landlords with a review of the tax efficiency of their affairs, including the following:

• reviewing the ownership of landlord’s property portfolios for tax efficiency.
• helping landlords efficiently pass wealth or income to family members.
• helping landlords affected by the loan interest restriction rules structure their tax affairs.
• helping review the remuneration policies and general affairs of those landlords with property investment companies.

With the tax rules taking a big bite out of financial returns, it is more important than ever that landlords structure their affairs in a tax efficient way.

At Crowe, we can help you with all aspects of property taxation, ensuring your affairs are structured to ensure you get the most out of your property portfolio. Please get in touch with Mark Stemp or your usual Crowe contact.