Throughout 2017, we’ll be looking in some detail at the different tax considerations and obligations that landlords come across over the lifetime of their property investments. For this month, a general overview.
How, when and how much you’re taxed depends on the way that you own and make money from property. That, in turn, affects what allowances and benefits you can take advantage of. You need to understand what’s best for your own circumstances, take expert advice and make sure you always have a way to keep up to date with industry changes that could affect you positively or negatively.
|The first thing you need to be clear on is whether you plan to simply buy, hold and let out a property, or whether you’re intending to build or renovate and then sell right away, because HMRC views those two strategies differently from a tax point of view.|
|Secondly - and this is related to the first point – do/should you own and let property as an individual or a company? Again, that will affect how you’re taxed on ongoing income and sale profits, and what you can offset against your tax bill. If you plan to leave property to your children or another beneficiary, you must also make sure your tax affairs are set up so they get what you want them to get and don’t end up with a huge tax bill.|
|The next thing to know is that – assuming you’re classed as an investor, which is the usual position for landlords - the rental income you earn as a landlord is not ‘standalone’ income. HMRC will put it together with your other earnings, such as your salary, so you need to be aware that the income you get from rent will be taxed on your personal code. That could push you into a higher tax bracket or mean you lose current benefits, such as child support.|
|Then you’ve got to recognise how complicated property tax is, particularly when it comes to refurbishment, ongoing maintenance and any improvements that you make to a property. It’s important that whoever is dealing with your bookkeeping and accounts is experienced in handling Buy to Let financials and knows exactly what is considered a ‘capital improvement’, what items come under ‘repairs’ and which are ‘maintenance’. To make sure you maximise your profits and minimise your tax bill, make sure you always use a recommended property tax specialist.|
Finally, remember that no matter how well you plan, set up and run things from the start, so that your Buy to Let investment is as tax-efficient as possible, things can change with every new budget – sometimes dramatically. For example, the upcoming reduction of Buy to Let mortgage interest relief means some landlords will struggle to make their current property investment model financially viable. And that’s got nothing to do with them planning badly; it’s simply because when they made their plans, the rules were different. So, be prepared for tax rules to change periodically and try to invest in a way that gives you some flexibility if future budgets bring more unwelcome tax changes.
As far as professional advice is concerned, if you haven’t already gone through your financial affairs with either a wealth manager or an independent financial advisor who is also a property tax specialist, you should certainly consider doing so. They’ll be able to look at all your income and other investments and help you make sure you’re investing in property in a way that helps you meet your financial goals. You’ll have to pay for the best advice, but the right experts can save you many times over their fee on your tax bill.
Look out for Tax Talk #2 in next month’s landlord newsletter: Establishing your tax status with HMRC and understanding your liability.