Retirement tax-planning options for UK landlords

This week, Mike from GoSimpleTax gives Landlord’s the low down on tax planning for retirement.

According to the Centre for Ageing Better, life expectancy has tripled over the course of human history. In 1840, when infant and child mortality rates were still very high, the average life expectancy for a British man was just 40 years and it was 42 for a woman. By 1951, this had increased to 66 and 72 respectively.

Fast forward and according to official ONS figures, a man aged 65 in the UK in 2020-22 could expect to live until he was 83, while a woman could hope to live until she was 85. With people living longer, we all need to better prepare for our retirement – including the UK’s 2.8m landlords.

What are your pension options?

You may still be some way off retirement and want to know more about private pensions. There are no restrictions regarding how many private pension schemes you can pay into or how much you can pay, although both will be determined by how much you can afford. The good news is, your private pension contributions are tax-free if they’re not more than 100% of your annual earnings or more than £60,000 a year.

There are two main types of private pension scheme: workplace pension (arranged by your employer, which you and they pay into) and personal/stakeholder pension (which you pay into, while your employer may also pay into it as a workplace pension scheme).

Did you know? You can use the Pension Tracing Service to trace lost pensions that you’ve paid into.

Personal pension key facts

The pension provider invests your personal pension contributions, often into funds made up of various types of shares and investments.
How much you ultimately get is determined by how much you’ve paid in, how much the investment value has increased or decreased and when and how you want to access the money.
The two main types of personal pension are stakeholder pensions (which must meet specific government requirements) and SIPPs (government-approved self-invested personal pensions – where you can have a say over the investments that make up your pension fund).
You can either make regular (ie monthly) contributions or individual lump sum payments.
Each year you should receive a report detailing how well or otherwise your pension fund has performed.
Tax relief is normally given on pension contributions.
Normally, you can’t access money in a private pension until you’re 55 (rising to 57 in 2028).

The new State Pension is the weekly payment you’ll receive from the government when you reach State Pension age (currently 66 for men and women, although this will increase). How much you receive depends on your National Insurance contributions and credits.

Need to know! Rather than putting money into a pension scheme, extending your property portfolio with more buy-to-let properties could provide greater returns for your retirement. Seeking professional advice is recommended, because the value of all investments can go up and down. If you don’t sell a buy-to-let property before you die, it could be subject to inheritance tax.

Taxable retirement income

Retirement income can come from many sources. In addition to the State Pension, this can include income from a private pension (workplace or personal). It can also include taxable income from employment or self-employment, should you decide against retiring completely, as well as returns from investments, savings interest, taxable benefits, selling assets and rental income.

You will only pay tax if your total taxable income for the year goes over your Personal Allowance (£12,570 for the 2024/25 tax year). The amount of tax that you pay will be determined by the Income Tax band into which your total taxable earnings fall.

Need to know! Usually you can take up to 25% of the amount in a pension (up to a maximum of £268,275 if you have a really good one!) as a tax-free lump sum.

Normally, your pension provider will deduct any tax you owe before they pay you, including any tax payable on your State Pension. It’s your responsibility to pay any tax you owe on other taxable income and that means having to complete an annual Self Assessment tax return. If any tax is payable on investment income, HMRC will work out how much tax you owe and tell how to pay it.

Did you know? If you decide to carry on working when you reach State Pension age, you won’t pay National Insurance contributions.

To sell or not to sell?

When you retire, you could decide to hang on to your rental properties. You’ll pay tax as before, if your total taxable income goes over your Personal Allowance (and Property Allowance if you don’t claim property-related tax expenses).

You really need to crunch the numbers to see whether rent and your other income will give you enough to live comfortably post retirement. Landlord costs are increasing all the time. There are many factors to consider before you sell off your rental property, including economic conditions, demand for rented property, interest rates, property prices, timing and your tax liabilities.

Need to know! It’s wise to seek guidance from experienced professionals so that your property, pension and tax decisions are guided by reliable information and tailored advice.

You don’t have to sell all of your rental properties, of course. You might decide to sell one or more to give you a nice lump sum, so you can buy a lovely retirement property and go on a few dream holidays or possibly invest in other assets (spreading risk can be a wise strategy).

Did you know? You can invest up to £20,000 tax-free each tax year in a Stocks and Shares ISA (2024/25 tax year). If you complete a tax return, there’s no need to declare any interest, income or capital gains on your ISA.

Capital Gains Tax

You may have to pay Capital Gains Tax if you make a “gain” (ie profit) when you “dispose of” (ie sell) property that’s not your home. Obviously, this includes buy-to-let properties, as well as business premises, land and inherited property.
Capital Gains Tax is not payable on your main home, unless you’ve let it out, used it for business or it’s a very big property.
To work out how much tax is due, you’ll need to calculate your gain, which is the sale price minus the purchase price (or value when you became the owner).
Capital Gains Tax is only payable on your overall gains above your tax-free allowance (“Annual Exempt Amount”). For the 2024/25 tax year, this is £3,000.
You must pay tax on gains you make on UK property and land even if you’re non-resident for tax purposes.
If you dispose of an asset you own with someone else, Capital Gains Tax may be payable on your share of the gain.
You must report and pay Capital Gains Tax due on UK residential property within 60 days of selling, otherwise interest and a penalty may be payable.
Visit government website GOV.UK to find out more about reporting and paying Capital Gains Tax on UK property and land.

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