If there is one issue that seems to leave landlords in the dark, it’s taxes. In a recent study by Paragon Mortgages, 78% of landlords felt confused or uninformed concerning changes in buy-to-let legislation and tax, with council tax and capital gains amongst their greatest cause of concern.
Though many participating in the survey were knowledgeable, a need for assistance is still required. The buy-to-let landscape is always changing and new regulations affect professional landlords the same as newcomers.
Moreover, the UK has inherited an unexpected bonus; not being part of the Euro. This has resulted in one of the lowest interest rates in Europe. Currently, some economists are forecasting that the base rate may not go up until 2016, with the consensus being for mid 2016. Incredible seeing that only a couple of years ago, many economists were predicting a rise in rates as well.
The first step a landlord needs to take to make their property tax efficient is to know what expenditures they can offset. For example, capital expenses, and those involved in buying and selling property are not permitted; however, revenue costs linked to the property’s day-to-day management are a different matter.
Nonetheless, though rental income is excused from VAT, the costs incurred in running the property may have VAT added. The positive spin is that all expenditures are tax deductible.
Tax Efficiency Tips for Private Landlords
Claim for all expenses:
Landlords should make certain that they claim all expenses when submitting a tax return. The expenses will usually include costs incurred during travelling back and forth to the rental property. Other expenses may include advertisement costs, telephone calls, or text messages made in connection with the rental property in addition to cost of safety certificates, bank charges, advisory fees, and subscriptions to property investment type magazines, products, and services. Emergency work such as boiler repairs, locksmiths and damages can often be neglected when calculating expenses – make sure you keep accurate records as it all adds up!
Splitting the rent:
A little known tip for private landlords is to put their buy-to-let property into a joint ownership and then divide the rent in the most tax efficient way.
Empty space expenses:
If for any reason the landlord’s buy-to-let property is empty for any length of time, any expenses incurred such as council tax or utilities can be claimed as a letting expense. You should also notify your insurer as it may be cheaper to arrange a specific policy for unoccupied properties than pay over the odds for the time your property is empty.
The home office:
If a buy-to-let owner has only one rental property or holiday home, they can claim expenses for managing their rental business and the associated costs of running a home office. The minimum is £156 without the requirement to provide written proof of any expense deductions. If they have multiple properties they could potentially save on their expenses buy buying a combined policy for their property portfolio.
If a landlord has borrowed money to purchase their property, they should make certain to claim any loan interest paid associated with the financing of their buy-to-let investments. This includes any funds borrowed from friends and family, and money taken from a credit card or personal loan debt in connection with their rental business. Only the interest on the loan and not any capital repayments can be claimed. It’s also possible to reclaim the cost of your landlord insurance as a business expense.
Carrying forward deficits:
Landlords that have experienced rental losses in previous years may not have realized it having never made a tax return before. These landlords may currently be making considerable rental profits that should be declared. Therefore, they should go back and estimate their rental losses from previous years. Rental losses from previous years can be carried forward and set off against rental income in subsequent tax years.
Avoiding capital gains:
If a landlord is facing a large capital gains invoice and sells their buy-to-let property, the situation can be avoided if they are ready to “move into” their property to claim Private Residence Relief or PRR, and possibly save tens of thousands of pounds in taxes.
Landlords who let furnished properties can potentially claim up to 10% of the rent as an expense via the wear-and-tear allowance. This is permitted as the depreciation expense on the furnishings of their rental property.
The secret to maximizing the amount of expenditures a landlord can officially claim is the concept of allotment and the “whole and exclusively” test applied by the HMRC to letting expenses.
Being late with a tax return:
Last but not least, in order for a landlord to not be a minimum of £100 worse off, they should submit their tax return no later than the end of January. However, if any capital gains are involved, an electronic submission is not allowed. This option is not available for landlords submitting a self-assessment tax return online unless they have an accountant with the proper tax software.