If you want to be a successful landlord, it’s essential that you’re tax efficient. Portico London estate agent has asked experts for ten legitimate ways that landlords can cut their tax bills:
- Know your expenses
The first step in making your lettings business tax efficient is knowing which expenses you can offset.
Seasoned landlord Richard Blanco urges: “Religiously keep all of your receipts so that you can offset absolutely every expense against your profits. Talk to your accountant about travel costs, certain motoring expenses or types of vehicles that can be set against your profits.”
The most common types of expenses are:
- Water rates, Council Tax, gas and electricity
- Business and Contents Insurance
- Letting agent fees
- Legal fees for lets of a year or less, or for renewing a lease of less than 50 years
- Accountant fees
- Rents, ground rents and service charges
- Direct costs, such as phone calls, stationary and advertising for new tenants
- The associated costs of running a home office
- Reduce your Stamp Duty bill
Blanco advises: “Avoid mega Stamp Duty by extending or expanding your current rental property(ies). Ultimately, the more expensive the property, the greater the theoretical savings.
“Now is a good time to extend because permitted development rights are more generous than they have been in the past. However, be mindful of the change in the HMO [House in Multiple Occupation] definition due to come into force in October. From then on, any property with five or more sharers will need an HMO license, so if you extend your property and it becomes suitable for more sharers, check it’s up to mandatorily licensable HMO standards. Ask your council’s licensing department if you’re in doubt.”
He continues: “The golden rule for expanding an existing property is that the uplift in value should be more than the cost of the works. There will be a ceiling price for properties in some areas however, which means your property may not increase over a certain price even if you expand it – unless the area improves. We’re in a tricky market at the moment, so do your sums and expect conservative price growth.”
- Transfer your assets
Another way to potentially cut your tax bill is to “use your spouse’s 0% and 20% tax bands,” Blanco explains. “Generally, no Capital Gains Tax [CGT] is payable if you transfer assets to your spouse. Plus, if their earnings fall into a lower tax bracket, you could pay less tax on the rental profits.”
Stamp Duty is not payable so long as the property is not mortgaged and the husband or wife who is passing on the property doesn’t want any money for it.
- Save when you sell
If you are selling your rental property, make sure you claim all of the available relief.
Blanco says: “If you’re a multi-property landlord, it’s often more tax efficient to sell one property in each tax year to take advantage of the 0% CGT band up to £11,300. Effectively, this means you can make gains of up to £11,300 in a given tax year without any tax being due.”
- Manage your property through a limited company
Some landlords find it is more tax efficient to manage their properties through a limited company, which effectively acts as a letting agent. The company could employ the landlord, relative or member of staff to manage the properties. Blanco advises that you talk to your accountant or tax adviser before proceeding.
- Restructure your portfolio
You can also set up an LLP or limited company as a way of allowing all finance costs to be offset against profits. This can be complex and expensive to set up, but it might be a positive step forward for landlords with larger portfolios.
“Always be wary of spending a lot of money restructuring your portfolio around tax legislation,” urges Blanco. “The Government could change the rules in the next Budget and you might then kick yourself for spending money on an expensive restructure.”
- Buy through a limited company
If you’re thinking of buying a rental property, setting up a limited company is more tax efficient in the sense that all finance costs can be offset against profits.
However, Blanco warns: “Beware of the extra cost of commercial mortgages. This could offset any savings you make in tax.”
Landlord and property expert Mark Lawrinson believes: “A great way of cutting your interest costs is by remortgaging. Buy-to-let mortgage interest rates have fallen significantly in recent years, so deals currently on the market may well be substantially better than on products arranged a few years ago.”
- Get your property re-valued
With large increases in house prices across the country, another tip is to get your rental property re-valued. This will make your mortgage lender recalculate your loan-to-value ratio (LTV), and a lower LTV means a better interest rate and a larger choice of lenders.
- Fill your voids
If your rental property is empty for any period of time, remember that expenses such as utility bills and Council Tax incurred can be claimed as an expense.
But, more importantly, rather than losing money while your property sits empty, why not let it on a short-term lets site, such as Airbnb, until you find a long-term tenant? Hosts typically earn up to 50% more on a short-term let than a long-term tenancy, so don’t miss out!
Follow this expert advice to cut your tax bills and become a more successful landlord.