You can legally reduce tax on rental income by claiming all allowable expenses (mortgage interest, repairs, management fees), optimising your property ownership structure through limited companies or SPVs which pay lower Corporation Tax rates, utilising capital allowances on furnishings, and carrying forward losses against future profits. The most significant tax savings often come from holding properties in a limited company rather than personally, as this allows full mortgage interest deductions and lower tax rates of 19-25% instead of Income Tax up to 45%.
Let's be honest – seeing a big chunk of your rental income disappear in tax is frustrating. But here's the thing: there are completely legitimate ways to keep more of what you earn. You just need to know what they are.
Start With the Basics: Claim Everything You're Entitled To
First up, make sure you're claiming every allowable expense against your rental income. You'd be surprised how many landlords miss obvious deductions:
- Mortgage interest (now claimed as a 20% tax credit)
- Repairs and maintenance
- Property management and letting agent fees
- Insurance
- Accountancy and legal fees
- Utilities if you're covering them
Keep your receipts organised and claim everything that's genuinely for your rental business. It's the easiest win going.
The Game-Changer: How You Own Your Property Matters
Here's where you can make a real difference to your tax bill. The structure you use to own property has a massive impact.
When you own property personally, you pay Income Tax on rental profits at your marginal rate – that could be 20%, 40%, or even 45%. Plus, since 2020, you can't even deduct mortgage interest as an expense anymore. You only get a 20% tax credit, which doesn't help higher-rate taxpayers much.
Enter the Limited Company Route
More landlords are switching to limited companies for good reason. Companies pay Corporation Tax on profits – that's just 19-25%. And here's the kicker: you can still deduct mortgage interest as a proper business expense. For higher-rate taxpayers, the savings can be substantial.
What About SPVs?
Special Purpose Vehicles are limited companies set up specifically for property investment. They give you the tax benefits of a company structure, plus they're cleaner for bringing in partners, securing finance, and scaling your portfolio.
The catch? Setting up an SPV properly involves incorporation, getting the right mortgage products, and staying on top of company accounts and tax returns. It's not complicated, but it needs doing right. This is exactly what Sourced Enterprise handles for property investors – they take care of the SPV setup and ongoing accounting, so you get the tax benefits without the administrative headache.
Use Losses Strategically
Had a year with major repairs or long void periods? Those losses don't just vanish. You can carry them forward to offset against future profits, reducing your tax bill down the line.
Think Ahead About Capital Gains
When you sell, Capital Gains Tax comes into play. Your ownership structure affects how much CGT you'll pay, and there are ways to minimise it through timing and using your annual allowances strategically.
The Bottom Line
Reducing tax on rental income isn't about cutting corners – it's about being smart with the legitimate options available. The biggest lever most landlords have is getting their ownership structure right, especially if they're building a serious portfolio.
Whether you're just starting out or looking to optimise an existing portfolio, taking time to understand your options now can save you thousands over the years ahead.
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