The Daily Telegraph - Saturday - Money
Legal tax loopholes: the ultimate guide for landlords
Government crackdowns have eroded buy-to-let profits, so it is more important than ever to know about the reliefs still available, reports Marianna Hunt
‘The biggest benefit of holding properties within a company is being able to offset all of your mortgage interest’
Buy-to-let owners have been hit by a series of punishing tax changes since 2017, causing many landlords to sell up. There are now 250,000 fewer privately owned rented homes than four years ago, according to the English Housing Survey. But there are still ways that landlords can save money on their tax bill and make the numbers add up.
USE THE STAMP DUTY HOLIDAY TO CREATE A TAX BREAK Until March 31, people buying a second home need only pay tax of 3pc on the first £500,000 of a property’s price, rather than up to 8pc. Landlords could use the temporary relief to give themselves a permanent income tax break.
Chris Etherington, of RSM, the accountants, said: “Married couples and civil partners could use it to change the split of ownership on their buy-to-let, which can bring tax benefits.” For those who own a rental property, HM Revenue and Customs’ policy is to split any rental income 50-50.
“Unfortunately, that standard treatment isn’t always good news for the couple from a tax perspective. For example, if one partner earns more than the other, it often makes sense for the lower earner to receive more of the rental profits,” said Mr Etherington.
There are two reasons for this. It may be because the lower earner is not using their full personal allowance or because they are in a lower tax bracket. “Similarly, if one of them is a higher-rate taxpayer and the rental property has a mortgage, they may not be getting full tax relief for the mortgage interest, whereas their spouse or civil partner would,” he added.
Gifting a property to a spouse if it still has a mortgage attached incurs stamp duty, so the current tax holiday offers a valuable opportunity to do so while paying less to HMRC.
PUT PROPERTIES INTO A COMPANY Property investors could use the stamp duty holiday to move properties into a company structure, which can be more tax efficient.
They are essentially selling the home to their new company and so, as director of the latter, they would typically have to pay stamp duty at the higher rate on the purchase.
David Fell, of Hamptons International, the estate agent, said: “Perhaps the biggest benefit of doing this is that all mortgage interest can be offset against tax when holding through a company while, from the 2020- 21 tax year, just 20pc of mortgage interest can be offset on properties held in a personal name.”
Another perk is that when you want to sell up, you pay corporation tax on the sale at a rate of 19pc, rather than capital gains tax of up to 28pc.
It is also useful when collecting rental income. Landlords are charged corporation tax at 19pc on their earnings, rather than income tax.
Unlike income earned by individuals, there is no National Insurance to pay and the first £2,000 in dividends per director taken out of the company each financial year is tax free.
Mr Fell added: “While a company can be set up relatively quickly and cheaply, the property must be sold to the firm at market rate, which will require an independent valuation.
“If the property is mortgaged, this transfer will also require the lender’s consent. Some buy-to-let lenders won’t lend to a company, so it’s usually best to transfer the property when the mortgage reaches the end of a fixed term.”
Buy-to-let owners may also have to pay CGT when “selling” their property to their limited company.
MAKE USE OF LITTLE-KNOWN EXPENSES Many landlords are unaware that they can claim back for expenses such as travel costs to and from their buy-tolet and phone calls made or texts sent in connection with the property. Those with a monthly contract can expense only the proportion of time that they use it for business purposes.
It is also possible to claim back the cost of subscriptions to property investment magazines or services, of advertising the property or for legal and accountancy fees connected to it.
There are further reliefs you can get when selling a buy-to-let, which owners can offset against their CGT bill.
These could include estate agents’ and solicitors’ fees, stamp duty when purchasing the property as well as surveying and valuation costs and money spent on home improvements such as an extension.
OFFSET LOSSES MADE DURING CORONAVIRUS Some buy-to-let owners have struggled to find tenants during the pandemic. Normally when a property is occupied, the renter will cover the cost of council tax and heating. Landlords who have to cover these bills during a void period can claim the cost back on their selfassessment tax return.
They can only claim if their rental business continued during the void period, for instance if they had other properties that were occupied while one was not.
TURN IT INTO A HOLIDAY HOME Furnished holiday lets are treated as a business by the taxman and so you can still offset your mortgage interest against your tax bill, unlike with a normal long-term rental.
Zena Hanks of Saffery Champness, the accountants, said: “If HMRC considers your holiday let to be a business, you may also benefit from paying tax at a rate of just 10pc when you sell it, whereas the maximum CGT payable on a normal rental property is 28pc.”
However, if you have a portfolio of, say, 10 properties and sell just one, HMRC is likely to question whether you really are disposing of a business and disqualify you from the relief.
Profits from a holiday let can be treated as income for pension purposes, which means if you put this money into a retirement pot, you can claim tax relief on it. With income from a normal buy-to-let, this is not the case.
There are restrictions on what counts as a holiday let. Homes must be furnished and available to rent as holiday accommodation for at least 210 days a year. The property cannot be occupied by long- term tenants for more than 155 days per year.
Costs and management fees can also be higher for short- term rentals and owners risk having longer void periods.
MOVE INTO THE PROPERTY BEFORE SELLING IT You don’t normally have to pay capital gains when selling your main home, thanks to the rules on Private Residence Relief. Some landlords may be able to reduce their CGT bill by claiming PRR if the rental property they sell has at some point been their main residence.
Ms Hanks said: “The period where it was occupied as such will qualify for exemption from CGT. Any gains made in the final nine months prior to the sale will also be exempt, whether you lived in the property during that time or not.”
She added that HMRC would quickly disqualify someone from PRR if it seemed as though they had simply moved into the property to pay less tax.
Mr Etherington warned that moving into a rental property before selling it could store up CGT issues for the eventual sale of any other home that the landlord owned.