Money maven: Can I pay myself for managing our properties?

QMy husband and I want to buy a couple of properties as part of our pension planning. If I manage them can I take a wage from the income and offset it against tax? What other expenses can we offset against the rent?

AWhether you can take a wage for managing the properties depends on the way you and your husband own them. Under current rules, owning residential property through a SIPP (a self invested personal pension) is not allowed. That leaves the options of buying directly in your joint names or through a company set up specifically to buy the properties.

If you choose the direct ownership route then you can’t take a wage as you are not an employee. The rent will be allocated for tax purposes as a percentage of your ownership — typically 50:50. Simon Thandi, director of UK Landlord Tax, explains: “The expectation is the work you do managing the property yourself results in a higher profit, which is effectively your wage.”

If you choose the company route then you can become an employee and take a wage, which will be added to any existing income and taxed accordingly. You can only claim a reasonable rate for managing the property, based on what an estate agent would charge you for managing it, typically 10-15 per cent of the monthly rent — plus extra for administration costs.

I don’t know your tax situation, but it is usually better as lower rate taxpayers to own the properties directly. You will pay lower rates of tax as the income comes directly to you and there tends to be a wider and cheaper range of buy to let mortgage deals on offer to individuals rather than limited companies.

If you are higher rate taxpayers however, the limited company route lets you control how and when you pay the tax. This is because the money goes into the company and is liable for corporation tax, rather than being added directly to your personal income. It is important you get advice from an accountant about your personal financial situation before you buy. A limited company can also offer inheritance tax planning options.

As for other expenses, you can offset the majority of costs against the rent. These include letting agents’ fees, accountancy fees, insurance, repair costs, refurbishment, ground rent and service charges, and any council tax and utility bills you are liable for while the property is un-let. If you improve the property, these costs can be claimed against capital gains tax when you sell the property, not income tax, as you are not replacing like for like. Some purchase costs such as mortgage brokers, arrangement and valuations fees can also be offset.

You can claim back 20 per cent of the cost of any interest paid on a mortgage, if you own the property in your individual names. If you own it through a limited company you can deduct all interest payments against corporation tax.