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Tax liability, Corporation Tax and Option to Tax Explained

By 22 February 2022March 3rd, 2022No Comments

It’s not a word that anyone particularly relishes seeing in the subject line of an email but – like it or not – tax is a fact of life. Or, as Benjamin Franklin put it, back in 1789: “in this world nothing is certain except death and taxes.”

In this article we’ll be looking at three type of taxes that can apply to those investing in property – tax liability for the self-employed landlord, corporate tax for landlords as limited companies and Option to Tax for landlords of mixed used properties (ie both commercial and residential).

Tax liability for landlords

All landlords who receive rental income from their property must declare this, along with any salary from a job and other income, such as savings, on a self-assessment form on an annual basis.

The current standard personal allowance (for the period 6th April 2022 – 5th April 2023) on which you don’t pay tax is £12,570. Any sum of money you receive after this is liable for tax, ie if you earned £30,000 in this taxable year then you’ll be due to pay tax on £17,430.

This would take you into the basic rate income tax bracket (income from £12,571 – £50,270) on which you would be charged 20%.

If you earn more than £50,000 per annum, you fall into the Higher rate income bracket, where you are taxed at 40%. Those who earn more than £150,000 a year are regarded as falling into the Additional Rate bracket, with tax on their income charged at 45%.

Self-assessment tax return

This is due to each year. Allowances you can claim against income include 20% against your mortgage interest, as well as your insurance costs, council tax and utility bills. If you have to replace furniture for fittings, then you’ll get something back on this and, finally, if the property is leasehold rather than just freehold then, you can claim against service charges and what you have to pay in ground rent.

Stamp duty

Landlords pay an additional 3% stamp duty tax on second properties (and 3% on every property after that).

Capital gains tax

Sell a property that isn’t your main residence and you’ll be due CGT. There is an allowance here too before you pay tax, which is £12,300. After that, you’ll pay 18% on profits, if you’re a standard rate taxpayer and 28% if a higher rate payer.

Corporation Tax and landlords

Landlords with larger property portfolios find it more profitable for them to become a limited company. That’s because landlord tax relief has been done away with in recent years – hitting Higher and Additional taxpayers’ profits most. Even some Basic rate payers were pushed into the Higher rate bracket, after the landlord relief was done away. As a result, many landlords listed themselves as companies.

As a company, Higher and Additional tax rate payers only have to fork out for 19% corporation tax (compared to 40% and 45% income tax respectively). Having said that, those with portfolios bringing in more than £50,000 annually, will be charged more in 2023 – up to 25% tax for those with profits of more than £250,000 (but this is still far less than income tax).

Option to Tax for landlords

An Option to Tax allows a landlord to charge VAT on the sale or rental of commercial property. But it’s not only landlords of commercial property that can consider using an Option to Tax, but residential landlords can also too. That’s because it relates to the land and the building on it.

It’s commonly used on mixed developments i.e., where the building is commercial with a residential component. An example of this would be a retail unit with residential flat above. Or it could be a developer buying an office block, demolishing it and building residential apartments on the spot instead.

New residential property is what is termed ‘zero-rated’ and the freehold sale of new commercial property is ‘standard rated’ (by ‘new’ that means less than three years old).

A landlord buying a new commercial property valued at £650,000 is charged VAT of £130,000. To get that VAT money back he or she would have to apply for an Option to Tax and charge VAT on the rent. It’s then possible to apply to reclaim the original £130,000 paid out for VAT along with any ongoing expenses and professional costs. When selling, VAT would again apply.

You have to inform HMRC that you wish to Opt to Tax the land and buildings you plan on buying or renting. VAT can be applied to any number of buildings at the one time, or you can opt to tax just a single entity. A major stipulation is that the application must usually be done within 30 days of the purchase. The way to let HMRC know of your intention, you have to download and fill out a VAT 1614A form. Email this to [email protected], or post to: HM Revenue and Customs Option to Tax National Unit, 123 St Vincent Street, GLASGOW, G2 5EA.

Find out more with Sourced

At Sourced franchise our experts can help landlords discover the best and most tax-efficient means of running their property investment business. We also provide leads on properties and access to finance to allow them to invest further and grow their portfolio. We host training courses focused on tax and accounting in property, delivered by experts. By joining Sourced, you will be assigned to a support person, who will be there to guide you and help every step of the way. To find out more about our franchise opportunity, then download our Sourced Franchise prospectus today.


Sam Clayton

Franchise Manager