12 Frequently Asked Questions about Residential Property Tax.

The new year is an ideal time to review your property-related tax matters. Whether you’re a landlord, homeowner, or considering your first property investment, understanding property tax can save money and reduce stress.

In this blog, we have compiled answers to the 12 most frequently asked questions about property tax.

1. What expenses can I offset against rental income?

You can offset revenue expenses incurred for your property against rental income. Common revenue expenses include maintenance, insurance, repairs, agent fees, etc.  However, for individual landlords, mortgage interest relief is restricted to 20%, meaning you receive a tax credit rather than full deduction.

Capital expenditure, such as property improvements, is only deductible when you sell the property, potentially reducing Capital Gains Tax (CGT) liability. Note that the tax treatment for Furnished Holiday Lettings (FHLs) will be abolished on 6 April 2025. For more information on this point click here: Furnished holiday lettings tax regime abolition.

• Can I offset property losses against other income?

Landlords with multiple properties can offset property losses from one property against income from another, but not against employment income. Property losses can be carried forward and offset against future rental profits. It’s essential to register any losses on your self-assessment tax return otherwise they could be lost.

• Can I switch property ownership with my spouse?

If your spouse is a lower or nil-rate taxpayer, transferring a portion, or a larger share, of property ownership to their name can be a tax-efficient strategy. This is especially effective if the spouse is a non-working partner, as the first £12,570 of rental income can be tax-free under their personal allowance.

• What is deemed occupation for Private Residence Relief (PRR)?

PRR is a tax relief that exempts individuals from paying CGT on the sale of their main home, provided it has been occupied by them as their primary residence throughout ownership; including both actual and deemed occupation. The last nine months of ownership are deemed as occupied, even if the property isn’t used during that time.

An individual is also deemed to occupy a property for:

1. Any period during which the individual is employed abroad
2. A period of up to four years in which the owner is absent from the property by reason of working away from home
3. Any period of absence not exceeding three years

Relief under (1) and (2) above is also available where the individual lives with a spouse or civil partner who satisfies the relevant work criteria.

• Can you elect a main residence if you have more than one property?

If you live in multiple properties, you can elect one as your main residence. The election must be made within two years of the date on which there is a change in the number of residences. The election doesn’t need to be for the property you spend the most time in but could be beneficial to elect the one expected to generate the largest future capital gain, thus exempting those gains from CGT owing to PRR.

• Can spouses have two main residences if they do not live together?

Where spouses or civil partners are living together, they can only have one main residence between them. If, at the date of marriage or civil partnership, each party has their own residence, they can jointly nominate which of the properties is to be treated as their main residence. The two-year window for making the election starts on the date of marriage.

For PRR purposes, spouses or civil partners are “living together” unless:

• They are separated under a court order or deed of separation, or
• They are separated in circumstances likely to be permanent.

• Can I transfer my properties to a limited company?

Transferring property to a limited company can offer several benefits, especially for landlords or investors.

• The ability to shift rental income from personal income rates to corporation rates can result in considerable tax advantages, especially for higher-rate taxpayers.

• Limited companies can also benefit from various tax deductions, such as allowable expenses and the ability to fully deduct mortgage interest from taxable income.

• A limited company is particularly beneficial for landlords and investors looking to streamline their property business operations and protect personal assets.

• Individuals can be flexible when it comes to drawing income / dividends from the company and make use of their personal allowances. This route also offers more opportunities for IHT planning in the future.

However, transferring property can have significant CGT and Stamp Duty Land Tax (SDLT) implications. Since you will be deemed connected persons, market values will need to be imputed to the transaction for these tax purposes. However, depending on your circumstances, Incorporation Relief and/or Partnership Relief may be available. These options could potentially allow you to mitigate CGT and SDLT liabilities when transferring properties from individual ownership to a company.

• Can I gift the family home to my children?

Gifting property is generally treated as a Potentially Exempt Transfer (PET) for IHT purposes. If the donor survives for seven years, the asset will fall out of their estate for IHT purposes, potentially saving beneficiaries up to 40%. However, the Gift with Reservation of Benefit (GWROB) rules require the donor to relinquish all benefits from the gifted asset for it to be excluded from their estate. If the donor retains any benefit, such as continuing to live in a gifted home, the asset remains part of their estate for IHT purposes at death.

For CGT, the gift is treated as a disposal at the time of transfer, irrespective of its IHT treatment. There are several tax planning strategies that may enable the donor to avoid the anti-avoidance legislation. These include:

• The donor paying market rent for the property after gifting it, while continuing to reside in the property.
• The donor and donee jointly residing in the family home following the transfer of ownership.
• Retaining only a minimal interest in the property after the gift.

• What are the different rates of Stamp Duty Land Tax (SDLT)?

SDLT is paid on increasing portions of the property price when you buy residential property.

For residential properties up to 31 March 2025, SDLT rates are:

• Up to £250,000                                                              0%
• The next £675,000                                                        5%
• The next £575,000                                                        10%
• The remaining amount (the portion above £1.5m)      12%

From 1 April 2025, the rates change too:

• Up to £125,000                                                             0%
• The next £125,000                                                        2%
• The next £675,000                                                         5%
• The next £575,000                                                        10%
• The remaining amount (the portion above £1.5m)      12%

Companies who purchase properties will be subject to an extra 3% surcharge on top of the standard SDLT rates above.

Given that the SDLT rates are set to increase, it could be worth planning on completing any property acquisitions prior to the 1 April 2025.

1. Do you pay higher rates of SDLT when buying additional properties?

When buying an additional residential property, a 5% surcharge is applied to the standard SDLT rates (see above). However, if you sell your previous main residence before completing the new purchase, you can avoid this surcharge.  You can also apply for a refund for the surcharge if you sell the previous home within 36 months of purchasing the other. A claim to HMRC would need to be submitted.

1. Do first-time buyers pay SDLT?

First-time buyers don’t pay SDLT on the first £425,000 of a property costing £625,000 or less, until 31 March 2025.

After April 2025, the threshold drops to £300,000 for properties up to £625,000.

For properties exceeding this threshold, you cannot claim the relief and the standard SDLT rates applicable at that time apply.  To qualify, you must never have owned, part-owned or inherited property in the UK or abroad.

1. Am I required to submit an ATED return?

The Annual Tax on Enveloped Dwellings (ATED) applies to corporate entities owning residential properties over £500,000. ATED is calculated based on property value bands. A full list of the charges and bands can be found here.  Where the property is not within the scope of ATED for the entire tax year, the ATED charge will be calculated proportionately.

There are multiple exemptions and reliefs available, but even if they apply, a return must be submitted to HMRC to avoid penalties.