Top ten tax tips for buy-to-let landlords

With HMRC's crack-down on landlords, targeting those suspected of owing tax on buy-to-let income, and a tightening economy which threatens to reduce profits, Smith & Williamson highlights tax-saving tips for residential landlords.

HM Revenue & Customs (HMRC) is closing the net on up to a million buy-to-let landlords suspected of owing tax on their rental income. But according to a leading accountancy and investment management group, cash-strapped landlords needn't resort to hiding from the taxman.

Geoff Everett, a tax director at Smith & Williamson, says:

"The best advice is to get to grips with the tax position so you know what you should and shouldn't do. That way, you stay within the law and don't pay tax unnecessarily.

"Given the backdrop of a declining economy and potentially dwindling profits, it's more important than ever that landlords get to grips with their tax position."

Below are Smith & Williamson's top ten tax tips for buy-to-let landlords.

1. Organise your finances - broadly speaking, it's better to minimise the loan on the home that you live in rather than the rental property. This is because interest on the loan for the investment property counts as a business cost so it is tax deductible, (ie when calculating your tax bill, interest on the loan is offset against rental income, thereby reducing your tax liability).
   
2. Efficient ownership - if you are married and your partner pays tax at a lower rate, consider transferring ownership to that person so that tax on rental income is paid at the lower rate.
   
3. Multiple properties - if you let more than one property in the same tax year, you can offset losses from one property against profits from another to reduce your overall tax bill.
   
4. Falling profits - if your profits have fallen since last year, speak to the taxman as your self assessment payments on account are calculated according to last year's level of profit. You may therefore be able to arrange a reduced tax payment which will ease cashflow.
   
5. Claim expenses - claim tax relief on repairs, insurance, letting agency fees, legal and accountancy costs incurred after the purchase of the property. Travel costs to visit your properties should also generally be allowable for tax.
   
6. Claim wear and tear allowance - if you let furnished property it is frequently simplest to claim the wear and tear allowance which means you automatically claim 10% of all income rental income as a business cost each year to cover depreciation and replacement of furnishings. Although landlords can choose to claim tax relief for replacement of furniture, this does not apply to the original items, and so the wear and tear allowance is generally the best option.
   
7. Repairs or improvements - recognise the difference between repairs and improvements. Repairs count as a business expense so they are generally tax deductible, whereas improvements are not. This is because improvements are considered to add to the capital value of the property.
   
8. Live in the rental property - if you live in a rental property as your main home at some stage, you can potentially reduce your CGT bill when it is finally sold. In some cases, this can save thousands of pounds.
9. Selling up - when you come to sell, it may be best to hold the property jointly with your spouse. This enables you to claim two annual CGT allowances (£9,600 x 2 = £19,200).
   
10. Minimise capital gains - capital gains tax (CGT) is now charged at 18% rather than a maximum of 40%, meaning a potential saving of up to £2,200 on a gain of £10,000.
    

For further information on any of these issues, contact:

Geoff Everett - tax director at accountants

Tel: 020 8492 8600
E-mail: geoff.everett@smith.williamson.co.uk

PR enquiries:

Kate Harrison, tel: 020 7131 4228

Jess Koslow, tel: 020 7131 4264

Disclaimer

By necessity this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Article correct at time of writing.

Note to editor

Smith & Williamson is an independent professional and financial services group employing around 1,500 people. The group is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices and mid-sized corporates. It operates from offices in London, Belfast, Birmingham, Bristol, Dublin, Glasgow, Guildford, Maidstone, Salisbury, Southampton and Worcester.

Smith & Williamson Limited

Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International, a worldwide network of independent accounting firms.