Landlord businesses are shared all over the UK, as property prices continue to surge across different cities and districts in the country. Many landlords gain financial freedom due to capital gains, and they are also liable to pay taxes on every form of income that they generate. Paying taxes on your rental income is something that cant avoid, and every UK citizen is liable to pay a category of landlord tax as long as they own and rent out a property in the UK.
Many landlords tend to be confused regarding the taxes which are liable to them. They do not consult with accounting professionals and then suffer losses and visits from the HMRC. Keep reading this article if you want comprehensive advice regarding the tax levied on your rental income.
Becoming a successful landlord takes a few steps, which include the management of taxes. Landlords often overlook the area of tax saving, and then they have to put up with the consequences of it. Landlords need to properly file their taxes and employ strategies to avoid paying an enormous amount of taxes in the longer run.
In this article, you can find the most straightforward strategies to manage your new landlord tax. Coupled with these strategies is some crucial advice that will allow you to reduce your tax bill.
The following are some critical tax-saving tips for landlords in the UK:
1. Form a limited company
You can set up a limited company, which would be a great way to reduce your tax expenses as a landlord. You will be under the status of a business venture, and all purchases made by you would be on behalf of the company that you own. This way, you will be able to offset expenses against the profits. Also, you are free to hire an additional resource to manage your properties or your entire portfolio.
However, this strategy does not apply to everyone. But if you can manage to do so, then it is a win. Seek advice from your accountants to understand this step and its positives for your status as a landlord.
2. Invest in your properties
You can invest in the existing features in your portfolio. You can avoid paying additional charges in the name of duty, and your property’s price would also increase at the same time. You can now extend your property. The recent development rights allow you to do so, and it would be an excellent step to increase your monthly income.
You will also need to take into account the selling price of the locality that your property is based. You can accumulate high profits if you extend your property. If you are making improvements in your property just to attract more potential tenants, you would also be affected by the changes introduced in the rules of HMO.
Valid from October 2017, a property that can house five or more tenants will need to have an HMO license. If you want to obtain a permit, you will need to go through different evaluations and checkups, and you will incur additional costs will. Apart from that, make sure that you assess the local council’s licensing regulations before anything happens to your property’s status.
3. Utilise all available tax bands
Another trick to reduce your tax expense is to shift the ownership of your property to your spouse’s name. This way, you can avoid the Capital Gains Tax, and so you can instead use the lower tax bands available to you. Other than that, you can also hope to pay less tax on your property if your spouse’s tax bracket is more economical than yours. Apart from that, you can avoid any stamp duties if your property does not have a mortgage associated with it and you are not benefitting from any sort of financial gain.
4. Make the most out of your property
That seems like an ineffective idea, but if you do not reassess your property, you will be surprised to find out how much money is left for you to collect every year as a landlord. Make sure that you revalue your rental property correctly, as it can make a marginal difference. The effect would be seen in terms of the property’s value and the perception of your business in the minds of other people.
A landlord can have a stronger position in front of lenders and banks who provide loans if you can do a correct assessment of your rental property. You can reevaluate your loan terms as well. If your rental property’s price increases, then that means the value of your loan would decrease, and in that case, you can enjoy a better interest rate for your rental business.
5. Do not avoid your expenses
Any does not recommend it means that you go out and avoid all forms of taxes. It is essential and an obligation to file your taxes on time. The best shot here is reducing the expense of your taxes by employing strategies of landlord tax relief that we stated above. However, avoiding taxes is an absolute no-brainer.
6. Opt for short term occupants
If you opt for frequently changing your tenants, there are ways you can pay fewer landlord taxes. Under this condition, you can claim council tax and utilities as regular expenses.
7. Sell your property efficiently
Many landlords tend to bear losses when they sell rental properties. That is because they do not reap the advantages of the available tax relief that is on offer for them. That applies to landlords who have multiple properties in their portfolio and can enjoy the benefits of the 0% Capital Gains Tax band every year if they decide to sell off their wealth. The tax-free figure is £11,300, which is easy to save up.
8. Separate accounts
One of the biggest mistakes that landlords make is that they fail to separate their statements in which they earn rental revenue from tenants. The deposits from your tenants should not be in the same account as your property income tax return. This way, you will never have to pay taxes on the revenue that you generate.
9. Expert advice
You cannot always know everything, and Google will not give you accurate answers at all times. Especially when it comes to VAT schemes, get advice from tax professionals when it is a matter of purchasing or leasing of commercial properties. Also, keep an eye on landlord tax changes in the UK.
10. Payment planning
Whatever income that you earn on your property, set aside a fraction of the funds that you make in a savings account. You can simply earn profits on your savings and pay your taxes by it. Besides, you should always meet the property tax deadline.
More on how you can you save on paying taxes…?
How to save tax in the UK? By reviewing the data sent by HMRC, it may contain errors and making sure that all the deductions entitled include both separate national deductions.
Among the most critical deductions are the investment in pension plans, deduction for housing purchase, the deduction for rental housing, or deduction for investment in newly acquired properties. Also, you should check that the maternity deduction is applied correctly if you have been a mother or that the maternity benefit has not in the rent.
If you are exempt from this landlord tax return, entitled to the deduction for geographical mobility or if you have included certain expenses school children when reviewing deductions, your primary focus should be the regional ones.
You can also save by guessing between the joint or individual declaration of rent. Of course, if you deduct for home purchase and you have not planned properly, you may not take full advantage of your options.
The best formula to save tax on a rental property in the UK is to plan the payment of personal income tax. In other words, it is making concrete decisions that will later lead you to pay fewer income taxes.
That happens by investing in certain assets to take advantage of the tax deferral (with investment funds, for example, you do not pay taxes in case of reinvestment and with pension plans either), for donating or for contributing more to your method of pensions.
These are the most used formulas to save on taxes:
Invest in pension plans: Contributions to pension plans reduce the income tax base and allow you to pay less. Of course, the tax savings are more considerable, the higher your income.
Amortise part of the mortgage
If you bought your house before 2013 and did not pay a mortgage of more than £9040 per year (insurance linked to the loan included), it is time to make a partial amortisation to spend less. It will also be useful if you are married and have not shared more than £18,080 between the two because if you choose to make the individual states, each one can deduct on a maximum basis. On the contrary, if you declare jointly, the limit of £9040 will be maintained.
Make losses emerge
Finance allows compensation of losses with capital gains. In other words, you can subtract the money you have lost in the stock market to the profits you have had, and you will pay taxes only for the difference. If in 2019, you have already had a loss, you can make another operation in which you are earning money to pay fewer taxes.
Let’s see it with an example. Harry invested in the stock market in stock A, and it didn’t go well at all. He lost £500. Fortunately, the rest of their investments are going well. With the shares of company B and C, he earns £350 and £450 respectively.
To save on rent, Harry can sell shares B and C to compensate for profit and loss. In this way, instead of paying £152 in taxes for that benefit (£66.5 and £85.5 respectively) you will only pay £57. The reason is that instead of paying an £800 bonus, it will do so for £300.
If your tax bill is going to be high, you can save taxes by contributing to a good cause.
Invest in startup companies: Investment in startups benefits from a deduction of up to 20% of the investment over a maximum of £50,000.
To these must be added to other strategic decisions such as rescuing the pension plan in the form of income or capital. The best advice at this point is not to save your pension plan the year you retire and wait, at least, for the next. Pension income will generally be lower.
Take advantage of exempt income
There is an exception on tax on the income statement, or there is a reduction. For example, health insurance contracted by the company which, like other remunerations in kind, are not taxed on income. If you are negotiating an increase, the non-monetary compensation will help you save on taxes.
We agree that this way of renting a property temporarily by paying an income helps to reduce the tax burden of companies. Since these payments – as well as maintenance and other expenses – are tax-deductible. For example, when leasing a property, monthly rent payments are cheaper than using a loan.
The key to paying fewer taxes is planning, that is, in thinking during the year about what actions we can take to reduce our tax bill. The year is not over yet, so you still have time to save on personal income tax on your next income statement.
It is not about looking for tricks to save on taxes, but about knowing what deductions you have at your fingertips for compensation to your practice. The most common example is to invest in pension plans to reduce your tax base, but it is not the only formula.
Shoaib Aslam is the co-founder of Pearl Chartered Accountants, a UK-based chartered accountancy firm that has multiple locations across London. They are experts in helping startups and established businesses with all aspects of growth, strategy, scaling up, accounting and tax planning.