Salaries and wages are costs for a private rental property rental business just like any other business – but don’t forget some key rules.
The main tax trap is for private landlords paying a salary to an owner of the property.
The rule number one rule is renting out a buy to let or shared house in multiple occupation (HMO) is an investment not a business, so the owners cannot draw a salary or wages for the time they spend managing their investment.
But, this still leaves a lot of scope to paying wages and salaries to friends and family who are not joint owners of the property – and an excellent way of encouraging lazy teenage children to earn some pocket money.
For instance, if you are married and your spouse does not work, you can pay them a salary for managing the property.
Points to watch
Don’t forget to watch these points:
- Paying someone can affect their tax if they have income from a pension, investments or another job
- From April 2013, you may have to register your payroll scheme with HM Revenue & Customs to comply with strict real time information provision rules
- Any payment must be in line with the rate for the job – so paying £100 per hour for cleaning is not really a good idea
Check the limits
Tax and payroll thresholds change every April and are generally announced in the previous year’s Budget by the Chancellor of the Exchequer.
For the latest rates and limits, check the HMRC web site
Let go of the money
The property owner must let go of control of the money if paying someone else to work for them.
That means transferring the cash in to the employee’s bank account – not a joint bank account. If you do not hand over the money, the tax man can argue you have not really made the payment while still controlling the cash.
Then, the payment is disallowed as a deduction from rental profits.
That means you could pay tax at a higher rate if the payment is added back and increases your annual personal income – especially if you are already a higher rate taxpayer.
