The tax efficient landlord


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Presentation to Nottingham branch of the National Landlords Association, September 2013 - tax efficiency for landlords and property owners

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The tax efficient landlord

  1. 1. Linda Frier FCCA © Coalesco Certified Accountants 2013 The Tax-Efficient Landlord Things You Need To Know
  2. 2. To be as tax efficient as possible a Landlord should consider both Income Tax and Capital Gains Tax. This presentation looks at the two taxes – covering income tax first…
  3. 3. Income Tax
  4. 4. If we consider a UK rental property (commercial or residential) and not a holiday let then….. • You pay tax on profits. • Profit is rental income, less property expenses less wear and tear allowance. • You complete UK property supplement on self assessment tax return (SATR).
  5. 5. • Tax is paid on profits as top slice of income – so if you are employed and are a 40% or 50% tax payer already then the profits from property will be taxed at 40% or 50% • If you are a 20% tax payer then the additional income may push into this bracket. • Remember, there are no National Insurance Contributions to pay. So on paper you want your profits to be as low as possible (or a loss) to ensure that you pay as little tax as possible. How do you do that?
  6. 6. Claiming tax relief on all your property expenses
  7. 7. The higher the expenses we can deduct the lower the profits and hence the lower the tax (if any) we pay. HMRC tell us that if rents are less than £77k then we do not have to analyse expenses into the boxes on the SATR but just enter the total. My tip: always split the expenses into the boxes reduce the possibility of questions from HMRC. Generally you can claim the running costs of your business as a deduction but you cannot claim as property expenses capital costs.
  8. 8. Clients who have completed their own SATR often miss deductible expenses: • Rent, rates insurance, ground rents etc. • Property repairs, maintenance and renewals. • Loan interest and other financial costs. • Legal, management and other professional fees. • Costs of services provided, including wages. • Other allowable property expenses. • See for/landlords for a full checklist Expenses should be incurred wholly and exclusively for the property business.
  9. 9. Maintenance and repairs – revenue and capital
  10. 10. It is not always easy to determine whether a cost is capital or revenue. For example, if you build a new conservatory or add a new bedroom this is clearly an improvement to the property and capital in nature. This is because it has enhanced and increased the value of the property.
  11. 11. Consider the replacement of windows. If you currently have rotten single glazed windows then you may want to replace them with UPVC double glazed windows. HMRC now consider such expense as a repair rather than an improvement even though the property has been improved by replacing single with double glazing. The cost of replacing windows is deductible against income.
  12. 12. You can save significant amounts of tax if big cost items are categorised as revenue if you have a profitable business. Always think, can the cost be justified as revenue?
  13. 13. Wear and tear allowance
  14. 14. For a fully furnished property you can claim 10% wear and tear allowance as a deduction against rental income. Definition of “fully furnished”: to a level akin to a holiday let. Part furnished properties do not attract this allowance. Covers the cost of repair and replacement for soft furnishings, white goods, televisions and other chattels. You cannot claim the expense of renewing any items that are covered under wear and tear.
  15. 15. You need to choose between claiming the renewal basis or wear and tear. It is usually better to claim wear & tear as you can realise this allowance immediately. On the renewal basis you have to wait to incur the repair or replacement expense. You cannot claim the cost of the buying the item initially. You can still claim the renewals basis for items not covered under wear and tear – these will be integral fittings such as the bathroom.
  16. 16. For example, if you spend £7.5k furnishing a brand new property before you let it, then none of this cost can be offset against your income until it is replaced which could be 5-7 years in the future. If you sell the property before you renew the furnishings, then by using the renewal basis you will not be able to offset any costs against your property. Using the 10% wear and tear allowance you can claim this from the date you purchased the property.
  17. 17. Alternatively, if you purchase a property that includes fixtures and fittings, then again it will be beneficial to claim the 10% wear and tear allowance. The wear and tear allowance is equal to 10% of the net rents after deducting charges that a tenant would usually bear but which are, in fact, borne by the landlord (e.g. council tax).
  18. 18. Rental losses
  19. 19. If you make a loss on your rental property you can roll the loss forward to the next tax year; any future losses continue to accrue until you start to make a profit. During the tax year in which your property generates a profit you will be able to offset losses from earlier years against the profit. You cannot offset losses against income from other sources in our assumptions – you may be able to offset losses from a UK or EEA holiday let.
  20. 20. In order to take advantage of accrued losses you must notify HMRC of such losses. Make sure you include all expenses on SATR in the early years to take advantage and reduce your tax liabilities going forward.
  21. 21. Remember to keep your paperwork
  22. 22. Retain all complete information relating to the property business for 7 years. Keep anything relating to the purchase or improvement to a property until disposal. On our website is a listing of items we recommend you retain.
  23. 23. Married couples and rental property
  24. 24. If you and your spouse hold a property jointly the income and expenses will be split 50:50 even if the property is held in unequal proportions. You can elect to have the income taxed in the same proportion as the percentage of legal ownership of the property. You do this by making an election to HMRC to disclose the income on the same basis as the share of legal ownership.
  25. 25. Should the property be held in equal shares it is still possible to make an election to apportion the income in unequal shares for tax planning purposes. A profitable property business where, say, the husband is a 40% tax payer and the spouse is a 20% tax payer or even has unused personal allowance can take advantage of such an election.
  26. 26. To do this you must have a solicitor draw up a declaration of trust which states the “beneficial ownership” of the property between spouses. Once the split is agreed, the declaration of trust states who is entitled to what, the original document must be sent to HMRC along with the election form. The new income split will only take effect from the date HMRC agree the split.
  27. 27. Financing a property
  28. 28. Remember you get tax relief on any interest you pay on borrowings under a rental property, where as there is no mortgage relief available for your own home. Think about how you organise your borrowings to maximise tax relief.
  29. 29. How should you hold a rental property?
  30. 30. There are different structures that you can use including: • Sole trader • Limited company • Partnership • Limited liability partnership You should consider both the tax and non-tax implications…
  31. 31. For example, if you do not need the money from your rental properties and you are the sole owner, you will be still taxed on profits even if the monies sit in a bank account untouched, say at 40%. However, if you incorporated a limited company you would not be taxed personally on the profits and the company would pay corporation tax at just 20% so savings can be made.
  32. 32. I have a portfolio that is owned for long term holding of residential property, is let to produce an income but not drawing money. I do not use limited companies because: • There are far fewer mortgage providers willing to provide buy to let mortgages. Rates and fees tend to be much higher. • Personal CGT allowances are significant if you sell a property. These are not available to companies. • CGT can be much lower than corporation tax. • I may choose to live in a property and I can claim reliefs for this. • Personal withdrawals from a company (over and above the amount I invest) would be taxable as earned income or dividends.
  33. 33. Capital Gains Tax
  34. 34. HMRC are systematically using the Land Registry to ensure that they collect all the CGT due to them. Despite the potential expense, many landlords fail to consider CGT planning when purchasing buy to let property. The CGT payable on disposal can reduce massively the returns available. The CGT system was replaced in 2008 whereby regardless of how long the landlord had owned the property CGT was charged at 18% or 28% depending on other income earned.
  35. 35. Landlords need to play the game of tax avoidance and plan to avoid tax bills. Remember the chargeable gain is: Sales proceeds, less sales costs (being estate agents and legal fees), less acquisition cost, less costs of acquisition (legal fees), less capital improvements (say an extension). Each individual has a personal exemption each fiscal year that they can use to reduce capital gains (2013/14: £10,900) but remember this could be needed for share disposals, etc.
  36. 36. Principal Private Residence relief (PPR)
  37. 37. This rule allows any landlord that has lived in their rental property as their main home at some time to significantly reduce their CGT liability. There is no specific time laid out in tax legislation. Tax case law has emphasised the quality of occupation rather than the duration. The onus is put onto the landlord to prove that they really “lived” in the house and not occupied it as a tax dodge.
  38. 38. Details which a landlord can use to reinforce their case are: • Demonstration that you have actually moved in and furnished the property, e.g. a receipt from a removal firm. • Copies of your official post so bank statements, utility bills and driving licence showing as registered at your home address. • The details for you on the electoral register at the home address. • Your family (unless separated) are also at the home address.
  39. 39. Having established that the property was your PPR at some point in the past there are a number of reductions that this status can provide. Where a landlord has lived in a buy to let property as their PPR the period of occupation, along with the 3 years of gains prior to disposal, is exempt from the CGT tax liability, even where they have not lived in the property for many years. The period that you lived in the property as your PPR is also exempt from any capital gains.
  40. 40. Letting relief
  41. 41. The other big relief for landlords who have lived in one of their rental properties as their main home is letting relief. This allows a landlord up to a maximum of £40k capital gain for letting their property. The relief is available for each person with an interest in the a buy to let property so, if it is jointly owned, each of the owners would potentially benefit from a £40k reduction in their CGT liability.
  42. 42. Get married
  43. 43. Get married and own the buy-to-let property jointly – we have already seen the advantages around personal tax. The following example shows how we can use the PPR relief and annual personal allowance for each person.
  44. 44. A and B bought a property to let in June 2002 and sold it in June 2012. They each own a 50% stake. The taxable gain with no occupation is as follows: Sales proceeds 375,000 Cost of disposal 5,000 Improvement costs 20,000 Purchase price 145,000 Cost of acquisition 5,000 Chargeable gain 200,000
  45. 45. Neither A nor B have lived in the property. A pays tax at 40% (salary £50k) and B pays tax at 20% (salary £20k). Each have a chargeable gain of £100k; after deducting their annual allowance of £10,600 (2012/13 allowance) each have a taxable gain of £89,400. CGT paid by A is £25,302.00 and by B is £22,784.50. In total, £48,086.50.
  46. 46. Taking the same couple but this time assuming they had lived in the property for one year in 2005: Chargeable gain 200,000 50% split 100,000 Less PPR 40,000 Less letting relief 40,000 Chargeable gain after relief 20,000 Less Annual Exemption 10,600 Taxable gain 9,400 Total tax payable 4,324 4 out of 10 years qualify for PPR exemption A charged at 28% and B charged at 18% One year of occupation saves nearly £44k in CGT.
  47. 47. • • • 0115 928 3228 • @CoalescoNottm