Reducing Tax burden on rental property.

Dean_H

Hi all, I'm reaching out for advice and guidance on a property I own and am looking to rent. 

I work full time and have a secondary employment so therefore already pay higher rate tax (40%).

I pay a pension in job 1 which also has an employer contribution element. I get a pension in job 2 but this is non contributory by me, so employer only (likely to be quite small). 

I own a property which is mortgage free and am looking to rent it out. What is the best way to avoid paying 40% of the rental income to HMRC please? I realise I can write off costs like insurance and some incidental costs via the self assessment process, however, I believe I'm still likely to be giving HMRC some serious cash. Is there a mechanism by which I can pay this in to my job 1 pension as AVC's or similar, should I start a seperate pension, etc, etc? 

Another option is to just sell the place, but what are the implications of this? 

Appreciate there is much to unpack there and a host of different options, my key goal is to enjoy maximum benefit from the property without lining the pockets of the treasury. 

Grateful for your advice and guidance. 

Hoenir

Tax is just one consideration as to whether letting property is a good use of tied up capital. 

kinger101

The only good reason I can see for letting out this property is that you have plans to live there again at some point in the future .

It would probably be possible to put yourself back into basic rate income tax via additional pension contributions but we cannot comment on the merit of work scheme v private scheme without more details.

By letting out the property rather than selling it;

(a) you'll be liable for additional SDLT if you buy another property;
(b) you'll have all the responsibilities of a landlord;
(c) it might not even be a good property to let out if the rental yield isn't good.
(d) it's a relatively high-risk way of using capital.  As well as potential costly void periods, if you get bad tenants, you might make a loss (it will take ages to evict them if they stop paying rent - they might trash the place).

fcjf

Obvious options include paying more into your pension to increase your 20% band and/or mortgaging the property so that you get 20% tax relief on finance costs. If your employers offer salary sacrifice that would be the way to go but if not you could open a SIPP.

The comments from kinger101 are clearly critical considerations as well as just your tax liability.

DRS1

Sell it if you can.
If it is not your principal private residence then there will be CGT to pay (within days of selling) but you will be shot of the place and can do what you like with the cash - ISAs, pensions, investments, premium bonds, VCTs, EIS, SEIS, the 3.30 at York....

Bookworm105

please note that technically rental profit is not "earned" income and so cannot be the source of money used to make significant pension contributions.  (see link below re £3,600 limit) 

That said, obviously you are taxed on your total income so in order to get below the 40% threshold, including the rental profit, you would need to make pension contributions from your employment income so as to lower that element of your total taxable income.

Pension schemes - UK Landlord Tax