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Interesting tax advice from an accountant

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I had a very informal off the record type discussion with an accountant about minimising my 40% tax bill on a few properties i have and he made a suggeston that sounded interesting - though possibly on the wrong side of tax avoidance so what are peoples thoughts.. An example of the way it could work would be


1. I have a property delivering £500 pcm rent and £200 in interest payments

2. I pay my non-working partner £300 pcm for an 'all inclusive' management of the property so includes all repairs/maintennance/etc

3. Therefore i have no tax to pay and my partner can use their tax allowance as well as hiring sub contractors to do maintenance work etc to minimise income and hence tax.


I get the impression that the 'partner' involved could be anyone and not neccessarily a spouse as long as I can show a monthly bank transfer for the amount and they do a self assessment bau. I also don't believe the partner has to setup as a property management business but would probably have to be self employed in some way


I guess my question is would the tax man see this as a 'scam' even though it may look legit?

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What you have said is the same way I am looking at things.


What is an allowable rate to pay somebody or a company?  the way I look at it is that they are a company and should therefor e be able to charge what they like its their choice? if other people don't use that particular company because the costs are too high then that's their choice. You can pay £15 for a gourmet burger or 99p from mcdonalds.


The issue I have is that I am looking to own the limited company that charges myself?  how would the tax man see this? tax avoidance I have no problem with and would be able to sleep at night,  however tax evasion is a different matter all together and don't want to be sleeping at night at her majesty's expense.  I am still waiting on my accountant to come back and give me advice on all of this. 

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Basically everything has to be seen as fair and reasonable for it to be allowed. There is no problem with the principle outlined but, is a 60% management fee fair and reasonable...especially if that fee is charged by yourself or a close family member? 20% for management, 20% for voids and maintenance, then what? A similar arrangement could be arrived at by changing the split of income between joint owners of a property, where more income is thrown at a basic rate taxpayer say...that's legitimate.


Incidentally, in the future, there would still be some tax to pay for a 40% tax payer in the arrangement described as mortgage interest would be capped at the 20% rate. Plus, whilst highly remote on a single let...the income for tax purposes here would be before mortgage interest payments and if that pushes you above £100k or £150k gross earnings then you would lose the personal allowance in the first case and trip into 45% tax in the second.


When you are a growing business, sometimes costs can run ahead of income, so in your example, employing a property manager on a fixed salary before they can operate at 100% capacity say, could give rise to a loss, however at what point will the taxman take an interest and start an investigation? These investigations are not fun and once they start digging...


Paying tax is not a bad thing, it shows you are successful, although of course taking advantage of all the allowances available to keep the tax bill down is just good business practice. Best not to overstep the mark though...

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Thanks richard and that was my concern i.e would paying 60% 'inclusive management' be seen as 'unreasonable' by the tax man. Looks like I may have to investigate the 'joint ownership' route and then see about doing a revenue split. My concern there was that I will be the person financing the mortage so would the mortgage lender have any concerns about a joint owner who has minimal income or having a joint owner with 99% share of the revenue?

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I have done some reading up on joint ownership and using form 17 to change the split for income between the joint owners for tax benefits. While it seems do-able, some of the details ( http://www.deedoftrust.co.uk/index.php/guidance/hmrc-guidance)imply its not so straightfiorward eg

Declaration must reflect reality

Married couples and civil partners do not have a general option to have income taxed in any way they like. They can depart from the standard 50/50 split for tax purposes only where

  • each spouse or civil partner is in fact entitled to a share other than 50/50 in the property and
  • the share that a spouse or civil partner has in the income is the same as their share in the property

This implys that hmrc may well ask questions if a 99/1 split is done to minimise tax for one party


Similarly, looking at the 'deed of trust' or 'declaration of trust' (not sure if these are the same thing or different) there are also comments that imply its not as easy as the sole legal owner simply transferring all income revenue to a spouse via a deed  - eg HMRC internal advice :


You may get claims that, while property is held in A’s name, it is owned by B, or that B is entitled to all the income. A common feature of such claims is that B is taxable on income at a lower rate than A, and/or has personal allowances to use. Some claims will be acceptable, others will not.

The taxpayer you are enquiring into would be A, who has potentially understated income. In some cases, B may have already paid tax on the income. In such a case, if A is ultimately taxable on the income, B may make an overpayment relief claim subject to the normal rules.

The arguments put forward about income tax may differ from those put forward about ownership of property for non-tax purposes. For non-tax purposes, often the claimant asserts that the property belongs to them, whereas for income tax purposes the (higher rate) taxpayer is likely to claim that the property (or income) does not belong to them. The cases that this guidance is concerned with involve two or more parties together alleging that a certain beneficial ownership of property or income exists. The parties are in agreement, but HMRC may disagree.

You will need to establish whether the alleged transfer of beneficial ownership of property or income ever took place, but note that the onus is on the taxpayer/s to prove that the beneficial ownership is different from the legal ownership


All seems a bit of a minefield

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I am an accountant, but I will point out straight away that I work in a manufacturing company and am not a tax accountant. I do however have an awareness of tax as you would expect and follow such topics with interest.


I have not commented on many topics about the recent tax changes on the PropertyHub mainly because, to be honest, this subject has so many variations and differences depending on personal circumstance that all readers should be very wary of rushing ahead based on these forums alone.


All too often members on here are wading into murky territory with their plans on how to avoid being impacted by the changes to the tax relief on mortgage interest. Schemes are concocted which will have zero impact the changes regarding mortgage interest relief, could potentially cost you more money, time and effort and could be so far from ‘reasonable’ that they actually set alarm bells ringing at HMRC and cause them to investigate you.


My advice would be first of all to assess your current situation and whether the changes would affect you and by how much. If it is a few hundred pounds, it may be that you are best taking it on the chin. If it will cost you a significant amount, then there is no substitute to engaging an accountant to set your affairs up properly bearing in mind your personal circumstances and property goals or legacy goals. To do anything else would be foolish, could cost you significantly in taxes now and in the future (stamp duty, capital gains, Inheritance etc) that you need not have paid in the future, or worse still no matter how inadvertently ignorant you may have unwittingly been, be fraudulent!


As landlords you would, I hope, be happy to pay a Corgi gas engineer to fix your boiler professionally, or an electrician to issue a gas safe certificate for a few hundred pounds etc. Be sensible and if you think the tax saving to you will be significant, or it will at least deliver peace of mind that you done all you can, engage a qualified and experienced accountant.


To return to the OPs suggested scheme, this like many others does nothing to address the additional tax they will incur from the reduction of relief on mortgage interest.


The initial suggestion by the OP was that if £500 income, then £200 interest expense and £300 of other expenses by outsourcing all management (and in their eyes ‘profit’) to a friend/partner/property management company they have set up (this is a really regular suggestion on these forums, delete as appropriate!), then surely there is zero profit left to tax?


Yes there is ‘zero profit’, but members MUST understand that taxable profit is different.


To understand why the suggestion is wrong, it is best to imagine that the new rules would be calculated in two steps, 1 – Tax calculated ignoring mortgage interest, 2 – deduct the relief provided on the mortgage interest.

Using the example above:

  1. Income = £500, less £300 expenses = Taxable profit £200 x 40% higher rate tax = £80 of tax
  2. Now, in the past the past the mortgage interest would have attracted 40% tax relief , but now it will only attract 20% relief, so:

Mortgage Interest relief= £200 x 20% = £40.

£80 of tax - £40 of relief = £40 of tax left to pay.


So despite there being zero profit, there is still a tax bill.


Yes, that £300 would also have been taxed at 40% as well, but whether the overall tax paid in moving this elsewhere is a separate discussion to that of the relief on mortgage interest.


I hope the above demonstration is useful.


While I am getting a few words of caution off my chest, here are a few other things that I have seen in these forums that have given me cause for concern and which hopefully demonstrate that using a professional is required:

  • "Incorporate, Corporation tax is only 20%, that’s much cheaper than Income tax at 40%!!" – Yes, but what happens when you pay distribute any of that money to yourself from your company? Yes, you get taxed again, so at the end of the day, the difference in terms of after tax money in your pocket is not as straight forward. Rob & Rob are guilty of over simplifying this in their podcasts!
  • "Incorporate, you can just lend yourself money from the business and keep extending the loan year after year without ever getting taxed!" – There rules in place to prevent abuses such as this.
  • "Just Sublet to a company you set up so all the profit remains in the company…" - Yes but your mortgage interest is still in your own name so a portion is still disallowable and increased tax bill will still occur.
  • "Just transfer all the property to a company and get a commercial mortgage and carry on in the company in future" – On the transfer there could be stamp duty to pay, capital gain tax possible early redemption charges for your BTL mortgage,

I am not trying to be all doom and gloom, just emphasise the point that there is a lot to consider and a lot that could go wrong. As I have already said, I am an accountant, a higher rate tax payer and am looking to start my own portfolio later this year when I am able to release equity from my refurbished home. I will be seeking the advice of a property tax expert prior to doing so.  It is your business and for many of you it is your livelihood. Give it the due consideration and care it deserves.


Thanks all, good luck.






Okay to be fair to haf1963, he wasn't talking about Mortgage interest relief, so I look somewhat silly for jumping the gun. What he is suggesting would save him some tax if his partner charged him for 'managing' the property portfolio at a sensible rate (assuming they do actually perform some function and it is not merely to trick the tax man!?) and reported the income on their own tax return. With regards to mortgage interest, my above comments still stand and hope that members still find it of interest to them.

Edited by DavidH82

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You make some valid points davidH82 and thanks for your contribution. As you said at the end, at this stage I am not really thinking about the recent govt tax relief changes but more just minimising tax (from 45%) using a non-working spouse.

I am indeed going to see a tax accountant but would like to build my own knowledge as much as poss before I do.

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A quick followup question. I'm thinking that the best option for me is 'tennants in common' with my non-working spouse - initially 50/50 but will get advice on whats sensible/legit in terms of me having a lower portion.

I just wanted to check that joint ownership doesn't affect my mortgage interest tax relief as I will be taking out the loan and paying for it so assume i can get 100% relief regardless of the ownership split?


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I think this is the best post I have seen on the subject of the recent tax situation so far.


I was not aware about the complications with the sub letting part and how you would still be liable for the interest relief tax even if you syphon profits off to another company. 


I have lots to think about

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A quick followup question. I'm thinking that the best option for me is 'tennants in common' with my non-working spouse - initially 50/50 but will get advice on whats sensible/legit in terms of me having a lower portion.

I just wanted to check that joint ownership doesn't affect my mortgage interest tax relief as I will be taking out the loan and paying for it so assume i can get 100% relief regardless of the ownership split?


 I think I have found the answer on HMRC website : http://www.hmrc.gov.uk/manuals/saimmanual/SAIM10040.htm

Its not about property but the principle is the same


Mr and Mrs A took out a loan in joint names for £100,000 that was invested by Mr A in purchasing shares in a qualifying company. The interest paid on this loan in the tax year 07/08 totalled £10,000 and was paid from a bank account held jointly in the names of Mr and Mrs A.

Mr A would be able to claim relief for the full amount of interest paid in 07/08 of £10,000

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I had another session with an accountant about what my best option is in terms of growimg my B2L while minimising tax (am HRT) and he he said, in the long term, setting up a ltd company would be my best bet in terms of being able to both utilise my spouse and minimise my personal tax. We talked around a number of areas susch as the need to grow the business versus take an income etc and the 2 main negatives were

1. harder to get finance given my model of buy bmv, refurb, rent, refinance

2. capital gains on selling up


on point 1 i can remortgage my personal property as well as tap into some other financial options - and then loan to the ltd company -  so that I am ok for the next few properties and after that the ltd company should have a decent track record to raise own finance

on point 2 then i am not looking to sellup in the near future anyway


The only other option we talked about was to keep the properties on my/my-spouse names but use the ltd company to manage them and re-invest the income etc. The downside of this is that I think it will not cover all the interest payments as they come down to 20%


All very interesting and needs more looking into as i have just got 2 properties at the moment and neither will have made much capital gains so timing wise i could move them into the company without taking a CGT hit..


thoughts/comments welcome before i see the accountant again

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Great thread with some good info - thank you


One additional one that is not a tax issue but associated with paying another individual to "manage" your property affairs would almost certainly place them in the category of being technically a managing agent which means that they would need to register with one of the property ombudsman schemes and have suitable professional indemnity insurance - a reason why I do not do this as an evening sideline for a few friends etc

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So, having gone through podcasts/websites/etc on the limited company approach then I am concluding that its the best option for me and will be discussing the details with my accountant shortly.  I'd appreciate comments on my numbers below in case there are glaring errors or tax traps. I am not looking for short term income or any selling. The numbers are based on real deals i have done so I am not worried about them being unrealistic etc - its more the principle I am looking to get checked


me : HRT and employeed
spouse : no income or employment

Setup a limited company with 50% shares each, me as sole Director (no salary) and spouse as company secretary with salary of circa £7000
We loan the company 200k to start and add more loan as needed
Buy a property for 100k
refurb/extend/add-value to 130-140k
get business mortgage for 100k with interest repayments circa £400pcm at 4-5% interest
assume rent of £800 pcm
pay a trusted third party 20% management fee for "fully managed service" of £160 (includes costs of minor repairs as well as finding tenants etc)
annual income = £9600
annual expense total = £6720

assume 4 properties then
annual income = £38400
annual expense total = £26880
less company secretary salary = £7000
less business running costs = £1000 (guess)
total profit = £3520 so tax at 20% = £704


can also take out upto £10000 in dividands (5+5) but no more due to me being HRT

i am mulling over a few things that i will talk to the accountant about

1. am i better of simply employing the 'third party management' person as an employee and paying a salary

2. is there any merit (tax wise)  in me charging the company interest on the money we are loaning to get things started

3. is there any merit in having a different share ownership split to 50/50

4. does it matter if spouse is company secretary or a director

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Great thread with some good info - thank you


One additional one that is not a tax issue but associated with paying another individual to "manage" your property affairs would almost certainly place them in the category of being technically a managing agent which means that they would need to register with one of the property ombudsman schemes and have suitable professional indemnity insurance - a reason why I do not do this as an evening sideline for a few friends etc

 I need to look into this as didn't realise special stuff was needed to manage a property given how many people seem to 'self manage' thesedays

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I'd say you could pay your spouse £300 per month. It really isn't much money. It only covers 10 hours of work! It's fine not to make profit as your model is capital gains. As long as your partner can account for how they spend their time if inspected should be okay. My god, I spend easily that amount of time messing about looking at property on rightmove each month (call it R&D). Your partner would have to declare the earnings anyway. Not sure what the fuss is about, maybe I'm missing something.

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