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.
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.