3 Tax Saving Tips for Landlords
The housing market is currently booming with the average UK house price increasing by 10.2% for the year to March 2021. One catalyst behind this surge is thought to be the stamp duty holiday due to end on 30 June 2021.
However, according to property market analysts, this surge may be short lived as house prices are expected to fall again post June after the stamp duty extension deadline, where the extension to the rate bands are expected to be in place until 1 October 2021. Please check our article on the Spring 2021 Budget for further information regarding this.
Amongst those acquiring new properties will be landlords purchasing buy-to-lets. With this in mind, we’ve set out 3 top tips below to help landlords efficiently manage their taxes.
- Keeping Track of Your Expenses
Running a buy-to-let landlord business naturally involves a diverse range of costs from the initial purchase price, to any property enhancements, to the running costs, to eventually the sale costs.
Therefore, it is important to 1) be diligent and keep receipts of expenses and 2) be knowledgeable about expenses, i.e. be able to distinguish between the two types of claimable expenses and be able to recognise those expenses that are definitively non claimable.
Capital and revenue are the two types of claimable expenses. To distinguish between them, it should be noted that generally a capital expense is a one-off property expense, whereas revenue expenses refer to the day-to-day costs of running your rental business.
Making the distinction is important, because capital expenses are used to minimise your capital gains liability upon sale of your property, whilst revenue expenses are offset against your rental income to reduce the amount of profit taxable on your rental business.
It should be noted that sometimes it can be difficult to determine whether an expense is a repair or a capital improvement; in these instances you should seek advice from a suitably qualified professional.
Examples of capital and revenue expenses are as follows:
- The purchase price and related costs
- Enhancement expenditure such as extensions, loft conversions and garages
- The sale price and related costs
- Cost of services, e.g. cleaners, gardeners, ground rent
- Property repairs
- Agent and legal fees
- Gas, electricity, water and council tax
- Costs incurred when travelling back-and-to the rental property
- Telephone calls made (or text messages sent) in connection with the rental property
- Any stationery and postage costs related to the rental property
Further to the above distinction, it should be noted that to claim revenue expenses, the ‘wholly and exclusively’ test must be applied, so that only revenue expenses incurred wholly and exclusively for the property business purposes will be deductible from rental income.
Finally, some examples of non-claimable expenses are as follows:
- Clothing – even if bought for business activities relating to the rental business, the underlying purpose of clothing is not to serve the rental business
- Private telephone calls
- Where a trip to your property has a duality of purpose, being partially for business reasons and partially for private reasons, the part of the trip for private reasons will not be an allowable expense
- Efficiently Managing Your Tax Bands
Another way you can reduce your property tax liability is by splitting your rental income with your partner (husband and wife or civil partners) in the most tax efficient way.
With this in mind, if your partner is operating in a lower income tax bracket than you, i.e. if you are in the higher or additional rate tax bracket, and your partner is a basic rate taxpayer, then splitting your rental income so that your partner receives a higher proportion of the rental income may be beneficial. This can be done in the following two ways:
- Electing to change your beneficial interest
If partners living together jointly own property as tenants in common, the default position is that income earned from this property will be taxed according to a 50:50 split. Although, a form 17 election can be made via the HMRC website to set a different split of income which actually reflects the beneficial interest.
However, it should be noted that HMRC will require evidence that the beneficial split is accurate e.g. if you paid 60% towards the purchase price, you may be entitled to 60% of the beneficial interest.
- Transferring your assets to your partner through a gift
Another way of potentially reducing your tax liability is by transferring the property to your lower tax rate band spouse. Gifts of assets between spouses are deemed to take place at a ‘no gain/no loss’ transaction, which means that no capital gains tax will arise from the transfer.
Therefore, there is nothing to lose and potentially a lot to gain by taking a closer look at how your income and assets are split.
- Forming a Limited Company
This option of forming a limited company to mitigate property income tax liability may not be appealing to everyone, due to the initial start-up time and costs, potential professional fees, and increased compliance. However, in 2019, it was found that 44% of landlords will now use a corporate structure to set up new buy-to-let purchases.
One of the main tax benefits of holding a buy-to-let in a limited company is that rental income is taxed at the corporation tax rate (19%), rather than the higher income tax rates (20%/40%/45%, depending on whether you’re a basic, higher, or additional rate taxpayer).
Furthermore, mortgage interest can be deducted in full as an allowable expense when the property is held in a company (i.e. as opposed to relief given as a 20% tax credit for individuals).
Despite the above tax advantages of holding a property in a limited company, there are various complexities to also consider meaning that it’s not always the most tax efficient option for everyone. With this in mind, it’s crucial to seek advice from a professional tax adviser to ensure that it’s the most suitable option for you.