Tax tips for Buy to Let Landlords
11 Tax Tips for Buy to Let Landlords 2019
Buy to let landlords need to understand that the business of buying and letting properties follows the principles of game theory. Players have to make rational decisions with a set of choices available to them, these choices will either impact the player’s overall strategy positively or completely hinder it later. In a business of buying and letting property, the particular approach will have particular effects on the tax payable and the deductions allowable for tax at a particular timeline, in the business life-cycle.
Unenlightened landlords will be at a greater risk to fall prey to different traps, so it is mandatory for them to follow a carefully devised plan that considers insights about the future and keeps up to date with new tax rules and regulations in order to reap maximum benefits.
Below are the key decision points comprising of several tips for a property business owner to consider:
Purchasing the type of property:
Tip 1: Conduct cost versus benefits analysis on renting commercial and residential properties
Residential properties as compared to commercial are less of a hassle to rent out and are cheaper, however, administrative complications may arise if tenants change continually. Commercial properties usually have a very extensive payment period but it turns out to be expensive at the end. An Accountant or a Corporate Finance specialist might be able to help you devise a complex financial model to assess the feasibility of various investments.
Tip 2: Timely payment of land transaction tax
Penalties are applicable if deadlines are missed, timely reporting and payments are advised. In England and Northern Ireland, SDLT(Stamp Duty Land Tax) on the purchase of property has to be cleared in 14 days, whilst LBTT (land and building transaction tax) and LTT (land transaction tax) have a deadline of 30 days in Scotland and Wales respectively.
Tip 3: Consider VAT (value-added tax) implications on commercial property purchases
It is desirable to consult professional advice for VAT from a VAT Accountant before purchasing a commercial property. The reason being is, commercial property purchases might be comprised of 20% VAT if the option to tax has been used or VAT may not be eligible in some purchases as VAT is not involved. Residential properties, on the other hand, are free of VAT charges. If you are unsure about how VAT works on property transactions consult a VAT Accountant, who is fluent in the dealings of VAT and property transactions.
Best holding structure for property
Tip 4: It is feasible to buy and let properties through a company
Companies can receive complete relief on interest payments and finance charges on loans taken to sponsor their property purchase for their property business. Individual owners are liable to pay up to 45% taxes on property income (46% for residents in Scotland) whilst property income taxes on companies are only 19%. If you want to form a company to hold a property portfolio, locate an accounting firm nearby or speak to an accountant for company formation services to help you set up a holding structure.
Tip 5: Be well informed of the tax record and profile of each owner
It is important to consider how much tax each owner is liable to pay on the overall rental income earned. Inspect whether the individuals increase in total income results in loss of allowances.
For instance, if the individual’s total income exceeds £50,000 due to an increase in rental income, high-income child charge will come into effect and strip the individual with some or all of the family’s child benefits. Make sure your accountant does a frequent tax review to determine the tax implications which arise due to the decisions you make.
Tip 6: Timely submissions of ATED ( Annual tax on enveloped dwellings) returns
An ATED relief claim for each year has to be completed if a company owns a residential property worth more than £500,000. This claim begins on 1st April and has to be submitted to HMRC within the same year by 30th April. Companies are subject to penalties if deadlines aren’t met.
Claim expenses to reduce tax payable
Tip 7: Consider tax credits if property not held through a company
Individual owners of residential properties have been restricted to enjoy the reduction in interest and finance charges since April 2017, a Tax credit of 20% has instead been introduced which is levied against the landlord’s total income tax liability. It will, therefore, be tax-efficient for a property business that is sponsored by loans to own residential properties through a company.
Maximise profits by utilising reliefs
Tip 8: Benefit through business rate relief
Small properties may enjoy a 100% relief on business rates for properties used for holiday lettings. These business rates are applicable to properties used for holiday lettings instead of being charged council tax.
Tip 9: Benefit through capital allowances
Properties qualify as furnished holiday lettings if they are let to different tenants for less than 31 days in a period of at least 105 days a year. This allows a landlord to declare capital allowances on the cost of furniture and fittings. The business owner may then enjoy the relief due to the capital gains made on the sale of the business. With new rules and constant changes, things can get confusing very quickly locate an accountant by looking for an accountant near me, or searching for online accountants, either way, do your checks, ask your questions but use an accountant who can save you time, money and stress.
Tax-efficient sale of your Property
Tip 10: Claim entrepreneur’s relief by selling a substantial part of the business
Entrepreneurs relief can only be claimed if a substantial part or the whole of the furnished holiday lettings business is sold. This relief allows a person to be taxed at 10% instead of 18% (basic rate taxpayer) and 28% ( other taxpayers) for every £10m made through capital gains on a residential property.
Tip 11: It is not advisable to sell individual properties
A buyer will have to pay a lower stamp duty of 0.5% rather than stamp duty rate of up to 15% on each property, only if a business owner decides to sell the entire company which contains a property business, hence it is not advisable to sell individual properties.
Selling the shares of a property investment company makes the owner ineligible to apply for entrepreneur’s relief, but the capital gains made through this transaction will be taxed at 10% or 20% instead of 18% or 28%, which is the CGT payable rate if an individual decides to sell a residential property held in their name.
Though these tips might uncover the simple problems a landlord may face and may provide solutions but this is just the tip of the iceberg, a lot of research is recommended to discover the hidden problems that are lying underneath. Therefore, it is also recommended to consult professional tax accountants in order to avoid any hassle in the future.
Clear House Accountants are specialist Accountants in London, we work with a large number of property clients, creating smart and tax-effective solutions for them. Our in-house tax accountants will make sure that you are always compliant whilst guiding you in understanding the complex tax system. Our tax planning solutions can help you keep more of your money while submitting taxes correctly. Speak to us to see how we can add value to your business.
Anam has a degree in accounting from the Prestigious St John’s University, and works as a senior director in Clear House.
Before working in Clear House, Anam worked in various commercial roles, the last one being the VP Operations for a prestigious business organisation,working on improving the organisation’s operational efficiency, growth and high level client management.
Anam manages clients ranging from software companies to large property developers and managers. Notably, she recently worked with a large property development company building large scale developments in London and the surrounding area.