Tax is complicated and infuriating and often makes you wonder if earning a living is worth it, especially if you are a landlord in the private rental sector (PRS). Tax planning for landlords is therefore a hot topic and one that we take very, very seriously.
It’s tough all round for landlords right now, thanks mainly to the legislation and regulation being heaped on us by the Government’s ‘hostile environment’ for private landlords. For example, the gradual removal of finance cost relief is really beginning to bite. In the current tax year just 25% of our finance costs are tax deductible and from April 2020 none of it will be tax deductible.
However, instead of exiting the market, how about putting all your energy into being profitable, starting with your tax affairs? Tax avoidance is completely legal as is tax efficiency which makes commercial sense. Like everything related to letting property, tax efficiency is all about being strategic and organised.
You must know by now that the ‘one-size fits all’ tax solution doesn’t exist – and this in itself is cause for celebration. You and your circumstances are unique and that’s your starting point.
What follows is my approach to tax – tips and advice gathered over the years both as a letting agent and an ethical and profitable landlord. This is one of two blogs on tax planning for landlords and is essential reading, no matter what stage you’ve reached with your portfolio.
Where does a rental property fit into your financial plans?
Are you buying property as an investment (e.g. to rent out), or are you really in the business of buying and selling? This question is at the core of tax planning for landlords. “Invest in bricks and mortar, you can’t go wrong” – yes, generally this is true but you still need to do the numbers and give some thought to what you want to achieve beyond making money. Trust me – the outcome will be much better for you all round!
Spend some time analysing exactly where property fits into your financial plans. For example:
- Do you need to fund something, such as school fees?
- Do you want your property to provide an income or supplement current earnings?
- Will this investment be a major part of your pension planning?
Don’t do something because you think it might be a canny tax move. Do something for a good commercial reason and then consider your tax options. Whatever you decide, HMRC needs to know – if you go for investment, but then start buying and selling repeatedly, they’ll be suspicious and assume you’re up to no good.
Keep your property business separate
Isolate your property rental business from any other form of income and earnings, including your pension. Essentially, you need to put it into a tax efficient ‘wrapper’ to avoid artificially increasing your taxable income. For example, purchasing property in a partnership or creating a limited company.
Do sweat the small stuff!
Tax planning for landlords is not just big picture stuff. It’s in the detail too. So, the more scrupulous you are about record keeping the less likely you’ll miss something that could effectively reduce your tax bill – or increase it. Finance cost relief might be disappearing but allowable expenses, through the day-to-day running of a property, can make a significant difference. Fees (letting agent, accountant, solicitor, etc) ground rent, council tax, maintenance, utility bills – it can all add up to tax relief.
We also encourage our clients to embrace technology and take advantage of the many apps created simply to reduce the bookkeeping burden.
Tax planning for landlords is a niche area
Whether your rental property represents a much-needed personal retirement fund or it’s part of your succession planning, you have a responsibility (if only to yourself) to make it as profitable as possible. In our experience, landlords are more knowledgeable about tax than they realise but, this is a niche tax area. The opportunities (and pitfalls) surrounding PRS require specialist knowledge. Getting the ownership structure right, for example, could make a huge difference to the amount of tax you pay over your lifetime (and beyond).
The next blog considers in more detail the different options for achieving tax efficiency. These are real life scenarios facing people in 2020 and the ways and means of making them work in your favour as a landlord.