When you rent out a property, it’s difficult to know where your money is going all of the time and you’re forever keeping your eyes and ears open for money saving tips for landlords. Renting out property means you’re liable to pay tax outside of any income allowances and the tax rules for renting property are quite complicated, made even more so by frequent tax changes and it isn’t expected to get any easier for landlords to navigate the HMRC rules.
It’s often said that the taxman is lining up their sites with the private rented sector and in Leicester, landlords often inform Harry Albert Lettings & Estates of their worries with regards to tax and, whilst Harry Albert Lettings & Estates aren’t property tax specialists in Leicester, they have some tips they can share with you from their recommended accountants based in Leicester to help you to avoid any landlord tax pitfalls.
Keeping good, up-to-date and accurate records is going to be key for landlords in 2019. It’s not only important to stay organised but having the information available at a moments notice will make your life a lot easier should you ever be audited by HMRC. There are also legal requirements to keep certain documents for tax purposes, including proof of expenses that you offset from next years’ tax bill.
Landlord Tax Return
When your gross income is higher than £10’000 or net profits exceed £2’500, you must complete a tax return by law which should be filed with the HMRC. If your earnings are below these figures, you should give HMRC a call to discuss your options but it’s likely they’ll still ask you to complete a tax return. For many landlords, a self-assessment will suffice but for those who hold their properties in a limited company or another special purpose vehicle (SPV), you’ll need to file a company tax return with Companies House and HMRC, you’ll also likely be obliged to complete a self-assessment for any dividend payments over a certain amount.
Losses can usually be carried forward and offset against future profits so it’s important to keep note of any expenses which should be detailed on your most recent tax return. Your accountant will be able to discuss allowable expenses as a landlord or property investor with you, as well as help you to understand depreciation and how you can offset the depreciation of the value of assets against your future tax bill.
Costs of furnishing
Often, a furnished property can be appealing to tenants but landlords need to carefully consider the costs of furnishing whilst also understanding furnishing costs are not an allowable expense. If you choose to furnish your property, the goods you buy won’t be liable for any relief and cannot be offset from your profits if you own the properties as a sole-trader (which you’ll be considered if you’re not operating as a partnership, limited company or other organisational formation). You will, however, be able to replace and repair furnishings, of which the costs are usually deductible from your tax bill but speak to a tax advisor about this. Replacements costs are categorised as Replacement furniture relief and are only available on a like-for-like basis whilst repair costs would fall under general maintenance and repairs.
Most landlords will own a property with a buy to let mortgage and for those unfortunate enough to own their properties in their own name, as opposed to in a company or SPV will see larger tax bills over the next couple of years as mortgage interest rate relief is abolished.
Previously, landlords and property investors could offset the payments made to cover the interest on their mortgage from their tax bill but announcements made a couple of years ago means this relief is being phased out from April 2017 meaning most will see their tax bills rise significantly. For those who own their properties in an SPV (beware of stamp duty and capital gains if you transfer your properties into a limited company, there’s no first-time buyer SDLT relief for limited companies), mortgage interest payments will still be considered a business expense.
Stamp Duty Land Tax
From April 2016, a surcharge of 3% is added to the cost of purchasing a second home. This was covered in our earlier article, Thinking of Buying a Second Home? What is SDLT? which we recommend you read but it refers to any future purchases beyond your main property, your family home, will be subject to a 3% increase in Stamp Duty Land Tax (SDLT). So, this means if your second (or third, fourth, etc) property is below the SDLT threshold, it will be subject to a 3% charge whilst a property costing more than £125’000 but less than £250’000, where it would be subject to a 2% SDLT charge if it was your first purchase, it will now be subject to a 5% charge. If you only have one property which you live in and sell it to then buy another property, this will not be subject to the surcharge.
Letting and Management Charges
When you instruct a reputable letting and property management agent to look after your investments in Leicester, you can offset these costs from your tax bill, which, if you find a fair a reputable agent, this will actually increase your return on investment whilst minimising your tax bill!
If you’d like to keep up to date with landlord tax and legislative changes, as well as tips on how to maximise your income, why not instruct Harry Albert Lettings & Estates to manage your property? You can call us on 0116 321 4970.