Very few of us enjoy filling in a tax return. But here are a few suggestions put forward by London based estate agents Portico and seasoned landlord Richard Blanco on ways that you could potentially reduce what you owe the tax man.
1. Expense, expense, expense
The first step in making your property tax efficient is knowing what expenses you can offset.
Richard Blanco urges you to “religiously keep all of your receipts so that you can offset absolutely every expense against your profits. Talk to your accountant about travel costs, certain motoring expenses or types of vehicles that can be set against your profits.”
Here’s a list of some of the most common types of expenses:
• Water rates, council tax, gas and electricity
• Business and contents insurance
• Letting agents' fees
• Legal fees for lets of a year or less, or for renewing a lease of less than 50 years
• Accountant’s fees
• Rents, ground rents and service charges
• Direct costs such as phone calls, stationery and advertising for new tenants
• The associated costs of running a home office
2. Reduce your stamp duty bill
Richard advises investors to “avoid mega stamp duty by extending or expanding your current rental property(ies). Ultimately, the more expensive the property, the greater the theoretical savings.
Now is a good time to extend because permitted development rights are more generous than they have been in the past. However, be mindful of the change in the HMO definition due to come into force in October. From then on, any property with five or more sharers will need an HMO license, so if you extend your property and it becomes suitable for more sharers, check it's up to mandatorily licensable HMO standards. Ask your council's licensing department if you're in doubt.
The golden rule for expanding an existing property is that the uplift in value should be more than the cost of the works. There will be a ceiling price for properties in some areas however, which means your property may not increase over a certain price even if you expand it - unless the area improves. We're in a tricky market at the moment so do your sums and expect conservative price growth.”
3. Transfer your assets
Another way to potentially cut your tax bill is to “use your spouse’s 0% and 20% tax bands.”
Richard explains that “generally no capital gains tax is payable if you transfer assets to your spouse, plus if their earnings fall into a lower tax bracket you could pay less tax on the rental profits.”
Stamp duty land tax is not payable on the so long as the property is not mortgaged, and the husband or wife who is passing on the property doesn’t want any money for it.
4. Save when you sell
If you are selling your rental property, make sure you claim all of the available relief.
Richard states, “If you’re a multi-property landlord, it's often more tax efficient to sell one property in each tax year to take advantage of the 0% CGT band up to £11,300. Effectively this means you can make gains of up to £11,300 in a given tax year without any tax being due.”
5. Landlord Ltd?
Some landlords find it is more tax efficient to manage their properties through a limited company which effectively acts as a letting agent. The Company could employ the landlord, relative or member of staff to manage the properties. Richard advises you to talk to your accountant or tax adviser about this before proceeding.
6. Restructure your portfolio
You can also set up an LLP and Ltd company as a way of allowing all finance costs to be set against profits. This is complex and expensive to set up but it might be a positive way forward for landlords with larger portfolios.
Richard advises to “always be wary of spending a lot of money restructuring your portfolio around tax legislation. The government could change the rules in the next budget and you might then kick yourself for spending money on an expensive restructure.”
7. Buy property through a company
If you are thinking of buying property, setting up a limited company is more tax efficient in the sense that all finance costs can be set against profits. Richard urges landlords to “beware of the extra cost of commercial mortgages. This could offset any savings you make in tax.”
If you’re considering setting up as a company to save tax, make sure you read and digest our landlord’s guide to incorporation.
Landlord and property expert Mark Lawrinson says that “a great way of cutting your interest costs is by re-mortgaging.
Buy-to-let mortgage interest rates have fallen significantly in recent years, so deals currently on the market may well be substantially better than on products arranged a few years ago.”
9. Get your rental property revalued
With large increases in property prices in London, another tip is to get your rental property re-valued. This will make your lender recalculate your loan to value, and a lower loan to value means a better interest rate and a larger choice of lenders.
10. Fill the voids
If your buy-to-let property is empty for any period of time, remember that expenses such as utilities or council tax incurred can be claimed as an expense.
But more importantly, rather than losing money while your property sits empty, why not Airbnb the property until your find a long-term tenant?
Hosts typically earn up to 50% more on a short-term let than a long term-let.