Property Tax Exemptions

Property tax exemptions and reliefs

Property tax exemptions and reliefs are a relatively straightforward topic on the surface, but they often have many moving parts.

Property tax exemptions and reliefs are a relatively straightforward topic on the surface, but they often have many moving parts. Over the last few years, there have been some significant changes in tax regulations for private property, personal property investment and investment via a company structure. While this has prompted some investors to reconsider their buy-to-let investments, it’s critical that you are aware of tax exemptions and reliefs for all of the scenarios. 

This article follows a recent one that covered less well-known tax exemptions but is focused solely on property. As with many investment tax reliefs and allowances, there may be time constraints or limitations that you may not be aware of.

Overview: Property tax exemptions and reliefs

When used correctly, property tax exemptions and reliefs are a means of either mitigating or eliminating tax liabilities, although they will very often require long-term planning. Property liabilities typically relate to capital gains, but, as we will see, there are scenarios where you may be liable for additional income tax. 

Whatever your scenario, it’s essential that you are aware of the most appropriate structure for your situation and that you react to changes in the future.

Tax exemptions and reliefs on private homes

Before we look at different ways of investing in property, several property tax exemptions and reliefs are available for private residences. These include:-

Private residence exemption

Under this tax break, which is also referred to as principal private residence relief, the sale of your primary residence is normally exempt from capital gains tax. For the vast majority of people, this will be a relatively simple scenario. However, where a secondary property was your primary residence for a period of time, you may be eligible for a partial exemption on a sale. This would be an issue to take up with your accountant and tax adviser.

Inheritance tax exemption

Regarding your share of a primary residence, anything you leave to your spouse or civil partner is exempt from inheritance tax. This is a valuable means of shielding your primary residence from tax on your death.

Residence nil rate band

In 2017, the government introduced a “residence nil rate band” of £175,000 to protect the family home from inheritance tax on death. This additional allowance can be used when leaving your main residence to your children or grandchildren. Together with the basic inheritance tax allowance, this provides potential protection on the first £500,000 of your estate.

Rent-a-room scheme

There is also a useful rent-a-room scheme that allows owner-occupiers or tenants who let out furnished accommodation in their home to earn up to £7500 a year tax-free. Where there is a joint letting arrangement, the allowance is split between the two individuals at £3750 each. If you provide additional services such as meals, this would be added to the rental income and count towards the allowance.

Investing in property as an individual

The 1980s saw a significant increase in homeownership across the UK, property investment, and the emergence of the buy-to-let sector. When investing in property, it’s important to know the property tax exemptions and reliefs and the most appropriate structure for your assets and income, whether in your name or as part of a company. We will now consider the consequences of investing in your name.

Buy-to-let rental income

If you acquire buy-to-let rental properties in your own name, the net rental income is added to any other income and charged at your relevant income tax rate. There are various charges which you can offset against gross rental income relating to the running and maintenance of the property. 

Mortgage interest relief

Historically, landlords could offset mortgage interest against their gross rental income to reduce their net taxable income. In April 2020, the government withdrew mortgage interest relief and replaced it with a basic 20% tax credit on rental income. This makes no difference to buy-to-let landlords in the 20% tax band, but for higher-rate taxpayers, it significantly reduces the amount of mortgage interest they can offset.

Capital gains tax

When holding an asset in your name, it is possible to offset all or part of any gain against your capital gains tax allowance. This allowance has fallen significantly recently, from £12,300 per annum to £6000 in the last tax year and £3000 in the 2024/25 tax year. 

Usually, any profit over and above your allowance would be added to your income and charged at the appropriate tax rate. However, there are separate rates for profits on residential property ranging from 18% for basic rate taxpayers up to 24% for higher rate taxpayers (recently reduced from 28% in the Spring Budget 2024).

Property allowance

Each individual also has a property allowance of £1000 a year, which can be used to offset gross rental income. It’s important to note that this allowance cannot be used against income as part of a rent-a-room scheme but could be used against another property or where perhaps you rent out a caravan or even a boat. As a condition of using your property allowance, you cannot offset any associated costs, so getting professional financial advice is essential.

Investing in property within a company

As your buy-to-let property portfolio increases, the subject of whether to switch from personal ownership to a company structure will likely arise. Before we look at tax exemptions and reliefs for company-based investments, it’s important to note the legal position. In the eyes of the law, a company is seen as an individual, a standalone legal entity that can take out loans, own property, sign agreements, etc. 

Tax on property income and profits

While there are specific rates and exemptions for income and profits for property held in your name, the situation for a company structure is relatively straightforward. Property gains and income within a company are subject to corporation tax instead of personal income or capital gains. For the 2024/25 tax year, the main rate of corporation tax is 25% although this is reduced to 19% for what is known as the “small profit rate”, companies with profits under £50,000.

Deduction of expenses

Putting aside the subject of personal and company mortgages, two very different sectors, there is one significant difference regarding the deduction of expenses. Any charges incurred in relation to finance, such as interest on a mortgage, can be deducted from gross income when calculating a company’s taxable income. This is in stark contrast to the changes to mortgage relief for individuals, as stated above.

Annual tax on enveloped dwellings

As a side note, there is an additional tax known as the annual tax on enveloped dwellings, which relates to property held within a company. Property assets need to be revalued every five years, and the total value will attract an annual charge ranging from:-

  • £4400 per year for property assets valued between £500,000 and £1 million
  • £287,500 per year for property portfolios valued in excess of £20 million

While those using companies to manage their property assets are unlikely to reach the higher echelons, this is still a charge that needs to be considered.

Summary

The tax system, particularly property tax exemptions, varies significantly for personal and investment property held in your name and those managed via a corporate structure. There are also additional running expenses and charges for drawing income from a company, whether via dividends or salary, which will impact your net return. 

If you are considering property investment and are uncertain about holding assets in your own name or via a company, it’s critical that you take financial advice from a specialist.  

We would welcome the opportunity to discuss your situation and plans in more detail and consider the options available.

 

Chris-Wilkins

Chris Wilkins FCCA is a Chartered Certified Accountant, Registered Auditor and the managing partner of Wilkins Southworth based in Barnes, South West London

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