Minimise your tax liability – 5 tips for landlords
Owning a rental property exposes you to a complex world of taxation! Recent years have seen unfavourable changes for landlords, such as:
-
Elimination of mortgage interest deduction
-
Introduction of additional purchase taxes for investment properties
-
Reduction of capital gains tax for all asset classes except property
To maximise profitability, landlords must minimise tax liability. Here are five strategies to achieve that goal.
1. Seek guidance from an independent property tax expert
Navigating property tax requires specialised knowledge, making it crucial to consult with a professional well-versed in buy-to-let investments. Even if you already have a trusted accountant, seeking advice from a specialist is worthwhile. They can accurately evaluate your income, expenses, and property-related costs, ensuring your property business operates in the most tax-efficient manner.
Additionally, it's advisable to engage a bookkeeper or accountant familiar with landlord operations to maintain proper ongoing records and accounting.
2. Consider the potential benefits of investing through a Limited Company
For some individuals, owning or leasing property through a Limited Company might offer tax advantages compared to personal ownership. Key benefits include:
-
Lower corporation tax rates, particularly for higher and additional rate taxpayers
-
Ability to retain profits within the company
-
Potential for favourable tax treatment upon property sale or disposal of company shares, in contrast to individual Capital Gains Tax (CGT)
However, this approach isn't suitable for everyone and depends on factors such as your asset portfolio, business ventures, and income levels. It's essential to acknowledge that establishing a company entails legal obligations and administrative responsibilities, which must be carefully considered.
3. Consider establishing a partnership if you have a partner or spouse
If both of you are taxed at the basic rate, forming a business partnership to divide rental profits and pay taxes accordingly could be advantageous. However, it's crucial to seek professional guidance before proceeding with this option.
4. Explore property ownership division
For married couples, dividing property ownership (as tenants in common) can mitigate overall tax obligations. This strategy is particularly beneficial if one partner is subject to higher tax rates while the other has lower income or is not currently earning. For instance, allocating 80% ownership to the lower earner and 20% to the higher earner enables the distribution of rental income accordingly, potentially reducing tax liability from higher to lower tax brackets.
Moreover, each individual is entitled to an annual tax-free capital gains allowance of £3,000. By dividing ownership, each partner can utilise their allowance to offset capital gains tax (CGT) liability upon property sale. If the lower earner shoulders the majority of the tax burden, as a couple, you may benefit from a lower overall CGT rate, potentially reducing from 28% to 18%.
Before implementing any of these strategies, it's essential to seek tailored advice from a property tax expert or legal property investment specialist.
5. Ensure you retain all your receipts
It may seem like common sense, but without receipts, you won't be able to claim expenses! Expenses related to property investment generally fall into two categories:
'Revenue': expenses incurred in the day-to-day operation of your rental business, such as professional fees, transportation to and from the property, insurance, maintenance, and repairs. These can be deducted annually from rental income.
'Capital': larger expenses that add value to the property, such as kitchen renovations or adding an extension. These are subtracted from capital gains when you sell or dispose of the property.
Determining what expenses are deductible and when can be complex. However, by providing all your receipts to your bookkeeper or accountant, they can ensure you claim everything you're entitled to.
Want to know more about the lettings services LRG can offer you? Call us on 01344 753100 and quote that you’re an NRLA member to find out more about the exclusive discount* we can provide.
*subject to T&Cs, for newly instructed properties only
We always advise seeking professional advice from a specialist tax advisor.
