Tax time bomb 2020
Landlord tax saving stategies
It’s a great time to be a landlord.
Many of us landlords including me are making record rental profits but this also means potentially a record tax bill for landlords. This is because interest rates are still on the floor and latest projections indicate that they are likely to remain low for many years to come as national governments continue to respond to sluggish growth with a huge monetary stimulus.
Landlord Tax Saving Guide
Firstly, thank god we aren’t in the Euro. This means that the UK has one of the lowest interest rates in Europe. Firstly, we had the credit crunch and then Covid-19. Now some economists are predicting that the base rate may not rise until 2021, with the consensus being for late 2021. However, even with this tentative interest rate increase rates remain on the floor.
Rental profits galore
This is great for me as what started in 2008 as a one off year of significant rental profits looks as if it could extend into 15 years+ of revenue generation beyond my wildest dreams.
Landlord Tax time bomb
As with anything there is a flipside and in this case it’s marked landlord TAX.
As interest rates hit the floor. I had significant accumulated tax losses that I was able to carry forward indefinitely and set against my future rental profits. Over the last couple of years I’ve worked my way through these losses to a point now where in the last tax year 2009-2010 I was making significant rental profits.
The filing deadline of the 31st January is looming large for each coming tax year. I’m not looking forward to my tax return this year – it could be brutal!
Landlord tax reduction strategies
My strategy as ever is to minimise my landlord tax bill. Firstly, let me clarify the situation. Tax avoidance is fine but property tax evasion is strictly illegal. Landlords need to be careful they stay on the right side of the line.
I was talking earlier this week to one professional landlord who sees the current low base rate environment as an opportunity to ramp up his property maintenance and improvement program on his rental portfolio. Over the last few years he has spent over £30,000 upgrading his portfolio. As he explained he can off set this against rental profits. This has the benefit of reducing his tax bill now and also increasing the ‘letability’, rents and income smoothing his future profits when interest rates do finally start to rise. Firstly, landlords should be aware of what their allowable expenses are on a rental property.
Ten Tax Saving Tips For Landlords
Over the years I’ve developed a number of strategies for doing this. Here are 10 of my favourite landlord tax saving tips:
1. Claim for all your expenses.
Make sure that you claim for all your landlord expenses when submitting your landlord tax return. These should normally include:
- Costs incurred when travelling back-and-to the rental property
- Advertisement costs
- Telephone calls made (or text messages sent) in connection with the rental property
- Cost of safety certificates
- Cost of bank charges (i.e. overdraft)
- Advisory fees e.g. legal and accountancy
- Subscription to property investment related magazines, products and services
2. Splitting your rent
A little know tip is to consider putting your buy-to-let property into joint ownership, but then landlords split the rent in the most tax efficient way.
3. Void period expenses
If for any reason your buy-to-let property is empty for any period of time; any expenses such as utilities or council tax incurred when the rental property is empty can be claimed as a letting expense. For more guidance on whether a landlord is liable for the council tax.
4. Every landlord has a ‘home office’.
Even if you have just a single rental property; don’t forget that a landlord can claim expenses for running their rental business and the associated costs of running a home office. This is a minimum of £4 per week or £208 without having to provide written evidence of their expense deductions.
5. Finance costs
Landlords that have borrowed money to purchase their buy-to-let property should ensure that they claim all the loan interest paid relating to the financing of their buy-to-let investments. This include where a landlord may have borrowed money form friends or family or taken on credit card or personal loan debt in connection with their rental business. Remember it is only the interest on the loan and not any capital repayments that can be claimed.
6. Carrying forward losses
Many landlords who have made significant ‘rental losses’ in previous years may not have even realised having never previously made a tax return. These landlords may now be making significant rental profits which they need to declare. They should therefore go back and calculate their rental losses from previous years. This is because these rental losses can be carried forward and set off against rental profits in subsequent tax years.
7. Capital gains avoidance
Landlords that are facing a large capital gains bill if they sell they buy-to-let property could avoid this if they are prepared to ‘move’ into their buy-to-let to claim Private Residence Relief ( PRR) potentially saving themselves tens of thousands of pounds in tax.
8. Replacement Domestic Items Relief (RDIR) from April 2016
From April 2016 the wear & tear allowance which was only available on furnished lets and applied to net rents after taking away any bills due to the tenants but paid by the landlord was replaced by RDIR. Prior to that a landlord that let their property furnished could potentially claim up to 10% of the rent as an expense through the wear and tear allowance. This is allowed as the depreciation cost on the furnishing of their rental property. Since April 2016 Replacement Domestic Items Relief allows landlords to claim for the net replacement costs of items of furniture and fittings after the cost of disposal of the originals but allowing for any money received for the original items.
9. Apportionment
Key to maximising the amount of expenses a landlord can legitimately claim is the concept of apportionment and the ‘whole and exclusively’ test applied by the HMRC to letting expenses. Make sure you are not missing out!
10. Getting your return in on time
Finally, don’t be late. If you do want to be a minimum of £100 worse off then make sure that you get your tax return in before the 31 January. It will now have to be done online as the paper submission deadline has passed. You will not however be able to submit your return electronically if there are any capital gains element to your tax return. This option is not available for landlords submitting their self assessment tax return online. Landlords however are still able to do it through an accountant with the right type of tax software.
Using a company to save landlord tax
Increasingly landlords including myself are considering setting up a company to hold their buy-to-let portfolio in in order to save tax. Like anything in the tax world there are advantages and disadvantages to do this. We have explored in depth the opportunities to save tax by running your rental business as a company.
In essence having a company is more complex and costs more to run. There are advantages in being able to retaining the rental profits within the property business and then using them in a tax efficient way to purchase more property. The advantages only tend to out way the disadvantages where a landlord has a number of rental properties and is looking to expand their buy-to-let portfolio.
Got a buy-to-let consider turning it in to a holiday let?
One of the best landlord tax saving strategies I have discovered recently with my property portfolio are the tax benefits of owning holiday lets. Because a holiday let is considered to be a business or trade not an investment there are many more opportunities for a landlord to offset their rental costs against rental income than now exist with a buy-to-let rental property. However, running a holiday let is like having another business and is far more involved than just renting out a property on an AST and letting the tenants get on with it. Therefore a landlord will need to consider carefully before converting their buy-to-let and investing in a holiday let.
Here are five of my favourite tax saving articles from the Property Hawk back catalogue.
5 ways for landlords to slash tax
Taxing time of the year
A landlords income tax liabilities
Avoid tax return errors
EXPERT TAX ADVICE
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My daughter’s boyfriend wants to move into her flat, which she has a mortgage on it and he is willing to pay her half the amount of what he would normally pay in rent, does she has to declare that for tax?
I have 2 properties for which I still have to file a tax return.
Can you help me file a return so I minimise my tax liability?
Thanks
with 2 properties its worth paying an accountant if you aren’t familiar. I think its money well spent as they (should) know what to claim for. From my experience its actually saved me money.
Is it possible to set up a limited company a “management company” which you own to pay property management fees too.
1, is this legal
2, will this support in a reduction in tax paid?
Hello – I am a divorced parent. My wife lives with my sons in our original home, and I own a small home out of town. In order to live much closer to my sons, who live with my ex-wife, I’ve moved into an apartment and have rented my primary residence. My apartment rent is slightly higher than profits from renting my home. I would not be able to afford a comparable property in my wife’s neighborhood. So, my rental, rather than being a business for profit, is paying most of my rent in order to live near my children. Is there a tax break for my situation?
I think you would need to put the flat in someone else’s name who pays lower tax, or maybe set up a limited company.
im thinking of getting my first rental in the uk. i work in the UAE and own a family property in the uk.
Is it better to get the rental property with cash, or have a uk mortgage .
My age is 50
Above you say that there is a wear and tear allowance.
As a landlord myself I regret that this allowance was ended by HMRC in the 2016 Budget, and the last year when it could be used was tax year 1915/16.
my son and his girlfriend is living with me and paying 6oo altogether. do i have to claim it?
If you are living in the house it works a little differently, I think you are allowed a certain amount before you even need to declare, I rented a room to a friend and it didn’t need to be declared, although mine was only 300 so it might be different for you?
I currently earn £47000 per year, my wife is unemployed. Therefore can my wife take responsibility of renting our single property as the amount will be under the £12000 (roughly) that she is liable for? Is a tax return needed in this case?
That is the best solution as long as her name is on the property and the mortgage if there is one. I wanted to do that with my partner but even though I have a small income a month, it is not enough to get approval on even a tiny mortgage, which is a real shame as I wouldn’t pay any tax at all! Limited company is another way of doing it too.
Hi,
You mention Wear and year of 10% is still allowed. Wasn’t this tax benefit stopped?
Yes Neal, now replaced with RDIR Replacement Domestic Items Relief.
Hi! my friend got a UK property as a non-resident and already register as NRL.
The property is a room in a hotel.
and the total income shown as statement as below:
Total rental income : 4,800 GBP
Deduction
20% Tax (HMRC NRL Scheme) = 0 GBP
So net rental income = 4,800 GBP
Then she got a letter for self assessment tax return. (which the only way to submit now is by post… not for online)
As we know now, we need SA100 and SA105 paper to send by post.
Question:>
By this income she need to pay for tax or not ? and how much? 20% of 4800 GBP or exempt ?
quite confusing on file the sa105 form
Hope you understand.
Does anyone know the tax implications if you rent out and rent in a property at the same time? For instance, if rent out my property for £2000 per month, but then rent in one for £4000 per month (and the £4000 is my permanent residence) – do i then just get taxed on the £2000 – making this a costly exercise?
In terms of rental income losses:
Is this loss that we can carry over based on full rent -full expenses or do we have to stick with the full rental-allowable expense method?
I made a profit due to only 50% of allowed interest expense being claimed but if I take entire interest into account, I made a loss.
Hi If you sign up for the forum we can deal with specific questions there.
Hi, do your landlord tips apply to holiday rental owners too?
Thanks
Hi Rob they don’t. Have a look at the Holiday let tax guide.
If I rented a house that has my partners name on the mortgage for just the mortgage cost, and then I subletted it to other people, how would that impact taxing for him?
Depends on a number of factors try this about splitting the rent to give some further guidance
As interest rates hit the floor. I had significant accumulated tax losses that I was able to carry forward indefinitely and set against my future rental profits. Over the last couple of years I’ve worked my way through these losses to a point now where in the last tax year 2009-2010 I was making significant rental profits.
I let out my uk flat while i live in rented accommodation Thailand. Is my rent paid in Thailand deductable ?
As a single parent, I am trying to get help from family and a mortgage to invest in a buy to let to help us in future.
1. Is stamp duty considered an expense that can be deducted from rental income?
2. If the interest paid to family can be taken into account – what evidencing is required?
1. No
2. No see the changes to landlord mortgage interest payments...doesn’t matter who you pay them too.
Hello all,
I currently earn £42000 per year, my wife is unemployed. Therefore, can my wife take responsibility of renting our single property? We cannot live in our own house due to my service reason (work). The total rental annual amount will be around £18500 that she is liable for. Can I do this?
She doesn’t have her name in mortgage but she is a official occupier due to full time study (no employment)
Your idea is greatly appreciated!
My idea would be to get a good accountant to advise you.
I have decided to take over the management of my own rental property from my management company to reduce costs as I have lowered my rent to my tenant due to COVID. Can I claim for my own management costs on my tax return moving forward? The property is my family home which I have rented out and I have moved into a rental.
Almost certainly not unless you have it set up as a separate legitimate business with other paying clients. Double check with your accountant first though.
Hey guys! This is a really good forum- thanks for starting it.
My roar ends recently got a 2nd property by remortgaging on a buy-to-let on their current place. Due to covid they’ve not yet rented the property and are taking the opportunity to renovate.
My question – they’re currently not receiving rent but are paying the mortgage which means they’re not making any rental income. Do they need to still declare the mortgage cost and justify they’ve not yet had rental income to hmrc?
Many thanks
Hi Alex, detailed advice from HMRC on what qualifies for a rental business including the pre rental period
I have decided to take over the management of my own rental property from my management company to reduce costs as I have lowered my rent to my tenant due to COVID. Can I claim for my own management costs on my tax return moving forward? The property is my family home which I have rented out and I have moved into a rental. Look forward to hearing from you.
Seems strange but no; not unless you have a separate trading business.
I have had one property let out since August, I have kept all the receipts as it required a lot of work to get it to standard and get all the relevant certificates.
I work part time, should I get an accountant to sort out how much tax I require to pay?
Thank you
Hi Wendy, it’s all pretty straightforward to do it yourself. In my experience the biggest job is collating the figures. Once you have done that it’s pretty easy to put them in to the HMRC online form.
I’ve rented out my own house myself, and moved in with my mum to help her during the pandemic/keep her safe. Can I still claim costs such as insurance, travel costs safety certificates etc? Or residential finance costs. Or is this just for investor landlords?
Appreciate advise, th
If you have rented your house out and are receiving a rent you are landlord; so you can claim these costs just as you need to declare to HMRC the rental income you are now receiving.
I rent my house to a tennant as I live in my wifes family home (which I contribute to)
My mortgage is £550 per month with a rental income of £900 per month which I pay tax on so I make £1500 per annum after agency costs etc. but the tax man says I cannot claim my mortgage as a cost so it will now cost me £400 per month to rent the property is this correct?
You were only ever able to claim the interest element of a loan but with the loss of mortgage interest depending on the year will mean this is less.