Landlords are shipping more tax than ever despite the stamp duty holiday in England.
The main impact comes from the change in offsetting mortgage interest tax relief that came into full force in April.
Add to that an overhaul of how capital gains tax on disposing of an investment property and Chancellor Rishi Sunak is squeezing landlord cash flow to the limit.
COVID-19 has gripped the housing market, with prices rising following pent-up demand during the lockdown, but the government’s own tax experts from the Office of Budget Responsibility are predicting values may plunge by up to 16%.
The financial worries are on top of a ban on evicting tenants, rent arrears and tougher compliance rules, such as a ban on upfront tenant fees.
The whole shebang looks like the government milking landlords for cash and offering little in return.
But the good news is there are still several legitimate ways to pay less tax for landlords and property investors.
- 1 Tax Tip 1 – Switch owners
- 2 Tax Tip 2 – Going corporate
- 3 Tax Tip 3 – Keep brilliant records
- 4 Tax Tip 4 – Second home pensions
- 5 Tax Tip 5 – Pay less when you sell
- 6 Tax tips for buy to let landlords FAQ
Tax Tip 1 – Switch owners
Switching owners is an inexpensive and tax-effective way to quickly restructure a property portfolio.
This option is open to spouses and civil partners where one partner is a higher rate taxpayer and the other pays tax at the basic rate.
Tax law says these people can mix and match ownership of their assets as they like free of tax.
The way it works is to load the basic rate taxpayer with a share of ownership that uses all their banding – up to £50,000.
They pay no tax on the first £12,5000 and income tax at 20% on the remaining £37,500. – much less than the 40% tax rate for a higher earner.
Accountants and lawyers will charge a few hundred pounds for the admin and form filing, but that’s it.
And another benefit is owners can flip the share of equity back when selling a buy to let or second home to take advantage of their capital gains tax reliefs.
Tax Tip 2 – Going corporate
A thorny problem for landlords as HM Revenue & Customs likes to dispute the tax issues around transferring self-owned buy to lets into a company.
But any new purchases can go straight into a limited company.
The advantage is corporation tax is charged at 19% for companies as opposed to the 40% for high earners. Mortgage interest relief is also tax-treated as a full business expense rather than a 20% tax credit.
Companies have other benefits – you can hold or control drawing money to pay the amount of tax you wish. Tax is always paid but you decide when and how much, while if you are looking at estate planning and succession, you can plan to minimise inheritance tax.
Tax Tip 3 – Keep brilliant records
Record keeping is a chore that everyone really loves to hate, but in the end, accurate books mean paying less tax because you can prove how and when money was earned and spent.
Landlords should apply the penny-pinching attitude of Scrooge to their business expenses.
Keep every statement, receipt and any other bit of paper that saves tax.
Many landlords forget to claim expenses or have them disbarred by their accountants because they cannot show the money was spent on a business cost.
File them in tax years – for 2020-21 that’s April 6, 2020 until April 5, 2021.
Common expenses for landlords are mortgage relief, travel costs and repairs – but don’t forget the insurance, utilities and home as office costs.
Tax Tip 4 – Second home pensions
Buy to let or house in multiple occupation rental income does not come under the category of pensionable earnings, so no tax relief is paid if the cash goes into a pension.
However, rents from commercial holiday lets are pensionable earnings and do attract relief when paid into a pension.
For landlords and property investors flush with cash who want tax-efficient savings, the other alternatives are the Seed Enterprise Investment Scheme (SEIS) or Venture Capital Trusts (VCT).
Both provide seed capital for start-ups or early-stage companies and offer generous tax reliefs in return for the investment.
SEIS offers a 50% refund of income tax paid to offset against an investment of up to £100,000.
Tax Tip 5 – Pay less when you sell
As soon as you decide to sell an investment property, start planning for capital gains tax because it’s too late to make changes after the sale has completed.
Tax bills must be paid within 30 days and they are higher for many as the tax-exempt final period has reduced from 18 months to nine months.
If you are married or a civil partner and own a property in your own name, change the share ownership to include your partner to double-up on the annual CGT tax-free amount of £12,300.
If you have split ownership with a spouse or civil partner, check out your CGT liability and see if you can profit from any changes while remembering to take the cost of transferring equity shares into account.
Check those impeccable records to ensure you have listed all allowable expenses to reduce your CGT.
Look at reinvesting the cash if you don’t need it – the Enterprise Investment Scheme (EIS) allows deferring CGT that is invested in new businesses.
Tax tips for buy to let landlords FAQ
Ignoring the money side of your business sees landlords and property investors paying more tax than they need.
The rules about claiming business expenses are straightforward and well-documented online in many places.
The official version is the HMRC Property Income Manual (PIM) which is comprehensive guidance for tax inspectors drafted by HMRC.
Other sources of information from HMRC include the Property Rental Toolkit and property notes for the self-assessment tax return.
I’m worried that claiming too many expenses is attracts the taxman’s attention
The best way to make your tax returns bomb-proof is to keep detailed accounts that show every penny earned and spent with supporting documentation. You can claim as much in expenses as you like providing the spending was legitimately for a business purpose and you can show when and how the money was spent.
Should I own a buy to let personally or in a company?
How to tax effectively own a property depends on your personal financial status. The trend is to own through a company, but the extra costs and accounting work may not be worth the hassle for saving just a few pounds in tax.
I live with a partner – can we switch ownership tax free?
No. Only married couples or civil partners can benefit from tax-free switches of ownership to save tax. If you and your partner are unmarried you manipulate the share of the property you own on purchase, but any changes along the way will attract CGT although you can limit these to the annual exempt amount.
What expenses are offset against CGT?
CGT expenses are laid down in law, and in brief terms, cover the purchase price and related costs, including stamp duty and legal fees; the cost of any improvements and selling costs, like legal, auction or estate agent fees.