Recent announcements relating to changes in Stamp Duty and how tax is calculated on rental properties have been anything but encouraging for landlords and anyone thinking of investing in property.
However, what tax breaks exist for property owners.
How can you look to minimise your tax burden?
The current situation and upcoming changes
Fast forward a couple of years, and we might look back at the current situation and think how favourable it was. Certainly, planned changes are not designed to help the humble landlord.
There’s a need for rental properties, therefore there is a need for good quality landlords to let property at fair prices, however the Government seems determined to make their life more difficult.
That the net effect might just be an increase in rent prices, with tenants suffering doesn’t seem to have occurred to them.
A two per cent levy on Stamp Duty will make properties more expensive to buy unless you’re able to drive down the initial asking price. But the bigger changes are to how tax is calculated.
Whereas currently, the tax paid will be 20% on the difference between rental income and mortgage payments, planned changes will see the property owner pay tax at their personal rate on the entire rental yield.
If rental income is £20,000 and mortgage payments £15,000, currently the tax bill would work out at 20% of £5,000, or £1,000. Fast forward to 2020/21 and someone on the 40% tax rate would pay £8,000 tax and be able to reclaim 20% of the £15,000. Overall, the tax burden would have increased five fold from £1,000 to £5,000 and all profit would have been wiped out.
The changes mean it is more important than ever to be aware of the limited ways the tax system can work in your favour.
A change of ownership?
The impending tax changes will hit anyone on a higher tax rate; for anyone on the basic 20% tax rate they have no impact.
This means that for some couples it could be worthwhile transferring the property ownership if it means moving it to a basic rate tax payer; though only if this transfer doesn’t bump them into a higher tax band.
This is certainly worth considering when adding any more properties to your portfolio, for some property ownership is a family enterprise, so spreading ownership of properties around the grown up children for instance could reduce tax bills in the future.
If considering taking this step, seek independent financial advice to talk through the implications.
One thing you might hear suggested is holding properties in a limited company.
Opinion is divided here, and truth be told it will depend on your personal circumstances whether it is worthwhile or not.
For properties you already own, transferring them into a limited company is unlikely to be financially beneficial as it would likely be considered a disposal for capital gains tax purposes, and there would also be Stamp Duty to pay in most circumstances.
For future properties you purchase, there would be pros and cons to buying them through a limited company. Tax on rental profits would be at just 20% (for profits up to £300,000), which is the main reason people consider it.
However, finding buy to let mortgages for limited companies can be difficult, and the rates are rarely favourable.
Setting up a limited company for future purchases is certainly something to consider if and when you seek out independent financial advice pertinent to your specific circumstances.
Wear and tear + maintenance
As a landlord, you are able to claim against wear and tear in the property, but again the rules have changed. You’ve probably noticed that’s a theme.
If you let a furnished property, the existing rules would have allowed for you to claim for 10% of the total rental income, minus any costs you pay for the tenant.
However, changes from April 2016 will allow you to only claim for actual costs which occur, rather than the 10% figure which had been based on typical costs.
If nothing else, the change adds extra admin to the owner’s to-do list. However, it remains entirely possible to claim against updating furniture and fittings.
Note – you can only claim for replacing furniture, the initial furnishing of an empty property cannot be claimed back.
Maintenance can also be claimed back, for example fixing roof tiles or windows, or having the broken boiler fixed.
Of course, getting repairs done, especially those such as the roofing, guttering and windows can add significant value to the property.
Getting the tenant in – and managing the property.
Depending on your experience as a property owner, and also the amount of time you are willing to invest in running the property, you could run up costs both in terms of property management and also advertising to get tenants in.
Management via a letting agency can cost up to 15% of the rental income – if your rental income was a health £1,250 per month, then at a 15% letting agency fee you would be able to claim £2,250 back.
A smaller cost could arise in advertising to get a tenant in, be that online or via the local paper. Then, on finding the tenant, there are credit and background checks to be run and documents to be drawn up. This can run to hundreds of pounds, an amount which is tax deductible.
Bills and maintenance charges
Pay bills on the property – for instance have an arrangement where you, rather than the tenant, pay the water rates or council tax?
These expenses would be fully tax deductible.
Similarly, if you own a leasehold property you can claim against the ground rent, or any service charges in a block of flats or complex.
Miscellaneous business expenses
The more hands on you are with your investments, the more costs you are likely to accrue. These will range from phone calls to travel expenses visiting properties, looking for new rental opportunities or checking the upkeep of a property.
Often, the main motivation of a trip is important, if a trip is to check on property, with a small amount of leisure time thrown in that is likely to be acceptable as a tax deduction.
However, a family holiday with a couple of hours thrown in to scout a property cannot be offset against tax.
Property as a passive investment
Investing in property can still offer appealing yields and returns to those willing to do research and spend the time to properly manage their assets.
However, changes to how tax is calculated, and also the mood music which suggests more tweaks of this nature, mean the days of there being seemingly easy money to be made are over.
One increasingly popular option is crowd funded property investment, which is what we offer at the House Crowd. There’s a tonne of information on this site if you are interested, in short, how it works is that investors buy shares in a property (with shares usually costing £1,000 each). Then they get their share of rental yields, and, potentially also a share of capital growth if the property is later sold.
With this model, the management is taken care of by a holding company, the fact it is a Limited Company limits the tax burden, and as all funds are raised through investment the interest of a buy to let mortgage is not a consideration.
This model is a passive investment, where the investor choses which properties they want to invest in, but beyond that don’t have to work out what may or may not be tax deductible. Those jobs are undertaken by experts.
Whatever you choose to do
Whichever way you choose to invest, being aware of the tax situation – both the current position, planned changes and potential changes – is of increasing importance.
The buy-to-let market is increasingly popular, so there are twin pressures of increased competition for good properties, but also squeezes on profits.
We wish you the best of luck with your investments, and if you have any queries about crowd funded investment please do get in contact.