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Property business being classified as Investment Income by HMRC
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Raj K
Posted: 30 January 2022 16:27:48(UTC)
#1

Joined: 22/04/2016(UTC)
Posts: 2,819
Hi All

I wonder if any of you can shed some light on this. Although my accountant has said one thing I have have some doubts.

I am a small landlord and all my income comes from these rental properties. They are held in my name and not In a company structure. My accountant says HMRC classify it as investment income. As such I cannot contribute more than 2880 into my SIPP per year as I get no tax relief beyond that.

My question is if I actually do work to maintain this income, administration , effectively it’s run as a business then isn’t there an argument that HMRC should classify it as self employment income and thus allow me to make greater contributions to my SIPP? If anyone is able to provide clarity I would appreciate it. :)
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Ad B
Posted: 30 January 2022 17:14:13(UTC)
#2

Joined: 20/04/2020(UTC)
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Hi Raj,

Your accountant is correct. The letting of property is not a trade. if you have a large enough portfolio (and devote such significant time to it) then you can make a case of running a lettings management business (and thus a trade), but the key word is significant.

So it is correct that the income from lettings do not qualify as net relevant earnings for pension purposes.

Console yourself with the fact that you're not paying NI on the rental profits.
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Raj K on 30/01/2022(UTC), Tim D on 30/01/2022(UTC)
Raj K
Posted: 30 January 2022 17:17:03(UTC)
#3

Joined: 22/04/2016(UTC)
Posts: 2,819
Ad B;206479 wrote:
Hi Raj,

Your accountant is correct. The letting of property is not a trade. if you have a large enough portfolio (and devote such significant time to it) then you can make a case of running a lettings management business (and thus a trade), but the key word is significant.

So it is correct that the income from lettings do not qualify as net relevant earnings for pension purposes.

Console yourself with the fact that you're not paying NI on the rental profits.


Thankyou, yes it’s a small operation . I guess I wouldn’t mind to pay the NI f it gave me the ability to make more use of the SIPP. I do however pay voluntary national insurance every year so I have enough years for pension.
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Ad B on 30/01/2022(UTC)
Ad B
Posted: 30 January 2022 17:26:00(UTC)
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Without knowing your situation (so treat that as the biggest caveat), have you done exercises to see whether its worth incorporating the properties inside a ltd wrapper? There are pros and cons, stamp duty (potentially) on the way in, but perhaps if loan finance is a significant cost, then worth looking at (since loan interest is allowable inside the corporate shell, but not an allowable cost if owned by you directly.
Please treat that not as advice, as it entirely depends on your overall circumstances.
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Raj K on 30/01/2022(UTC)
Tim D
Posted: 30 January 2022 17:40:30(UTC)
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For a lot of established landlords, the big hurdle in getting properties from direct ownership into a company wrapper will be the tax on the capital gain triggered by the transaction.

BTW the phrase which always seems to come up in queries about "how much can I put into my pension?" is something like "relevant UK earnings" or "UK relevant earnings". And property income (and investment income generally) don't qualify as such.
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Raj K on 30/01/2022(UTC)
Raj K
Posted: 30 January 2022 17:45:42(UTC)
#5

Joined: 22/04/2016(UTC)
Posts: 2,819
Ad B;206485 wrote:
Without knowing your situation (so treat that as the biggest caveat), have you done exercises to see whether its worth incorporating the properties inside a ltd wrapper? There are pros and cons, stamp duty (potentially) on the way in, but perhaps if loan finance is a significant cost, then worth looking at (since loan interest is allowable inside the corporate shell, but not an allowable cost if owned by you directly.
Please treat that not as advice, as it entirely depends on your overall circumstances.


I have thought about this, as I understand if I transfer from private name ownership to a company structure I could be liable for stamp duty and capital gains tax on the transfer as it’s basically selling from one entity to another. I have heard if the property is owned as a partnership ( even a 1 percent partner) for a number of years before such a transfer there could be some relief on the transfer taxes …. don’t know this for sure.

In 2021/2022 tax year I will effectively be taxed as a higher rate earner because of this removal of mortgage interest from the profits that came into full effect in 2020/21 and then get the 20 basic rate deduction on the interest amount. I estimate I’ll be paying an extra 3000 to 4000 in tax as a result as my mortgage interest is 20000 . So in conclusion I think moving to company structure ( transfer taxes, potential higher mortgage rates, higher accountancy fees) might not be worthwhile as I plan to just stick with what I have as it’s hard to manage for me anyway.

I might try and space out my major renovations, not improvements (which have to be capitalised) to the rooms ( some properties are HMO’s) to bring the profit down as much as possible every year within limits of course.






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Tim D on 30/01/2022(UTC), Ad B on 30/01/2022(UTC)
Ad B
Posted: 30 January 2022 17:51:53(UTC)
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Tim D;206489 wrote:
For a lot of established landlords, the big hurdle in getting properties from direct ownership into a company wrapper will be the tax on the capital gain triggered by the transaction.


Careful. If the property business was of such a size to mean that it was a trade, then s162 incorporation relief could be used on the way in to postpone the CGT to the subsequent disposal of shares, many many years down the line.
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1 user thanked Ad B for this post.
Tim D on 30/01/2022(UTC)
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