Tax advisor saves top rate taxpayer £15,600 per annum

May 13, 2022

Rent to rent is where a property is let to another party who then let the property out to tenants. There are pro’s and cons to this arrangement but our focus here as the tax advisor was on the tax savings that could be made.

This is an actual case but of course, I have used fictitious names.:-

Miss Gibbs is 56 and a top rate taxpayer with PAYE income of more than £150k. She owns 2 properties. One in which she lives and the other which she has let out. The property in central London has just had a rent review and is now let at £1700 per week. Yes per week..!

Great news for Miss Gibbs. But alas with a tax rate of 45% and loss of tax relief on mortgage interest the position is such that on an annual income of £88,400 the tax bill comes to £32,700. After allowing for overheads of £5,600 and the 20% credit on mortgage interest of £22,800. Her net income is just £27,300.

Miss Gibbs is not looking to buy any other property. She has no children and is not too concerned about inheritance tax. She also intends to retire in the next 4-5 years. Her current accountant suggested that she transfer the property into a limited company. That is an option, but a very very expensive one. At a market value of 2.6m the SDLT and CGT costs make this a non-starter. He also mentioned something about a deed of trust to assign the beneficial interest to the company. On further probing it was evident that such arrangements are likely to be challenged at some point in the future by either her mortgage company and most likely HMRC.

Very frustrated she contacted us to see if we could help. We strongly warned her against using a deed of trust and directed her towards recent case law which has tightened legislation against such avoidance. See the Project Blue Case. Don’t do it was our straightforward clear advice.

Why not Rent to Rent I advised. Under this arrangement, Miss Gibbs would set up a limited company and agree on a rent for the property with the company. We suggested rent of £22,800 to cover her mortgage interest payments. The company would then let the property to the tenants and collect all rents and pay all overheads.

Miss Gibbs’s tax was reduced by £15,600 and she now has retained an income of £42,900.

She needs to of course check with her mortgage company and get the tenancy agreements re-arranged but other than that her tax position could be vastly improved. Miss Gibbs intends to retain the net income in the company until she retires and draw this down first instead of her pension thereby extracting the money as a basic rate taxpayer. Further increasing her tax savings.

Needless to say Miss Gibbs is now a client. She was sanguine about her experience and likened it to requiring heart surgery but going to your GP hoping they could help. Getting the right tax advisor is crucial and could save you £000’s. Speak to one of our specialist property tax advisers now on 0800 907 8633, via tax@fixedfeetr.com or online.

If you enjoyed this post, then why not read our next post on buying property through a limited company or our guide to property allowance?

Related blog posts

Inheritance tax on property

Inheritance tax on property

A major concern for landlords is how to avoid Inheritance Tax on property. When speaking to landlords, much like myself, they seek long-term capital growth and to supplement their current and retirement income with a view to protecting their property wealth and...

read more

Got a question for our landlord tax experts?

If there’s a property tax issue that has you puzzled or worried, get in touch. Everyone on our team loves to talk, especially when it helps people like you find peace of mind.