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Becoming a Buy To Let landlord is a big financial commitment, and there are many variables to take into account when deciding whether your property will be a viable return on investment. A crucial area – yet often overlooked – is tax-efficiency. With some careful strategising, this could save you thousands, perhaps making all the difference about whether or not to invest (or stay invested). In this guide, our financial planning team at Cedar House offers five ideas to help you improve the tax-efficiency of a Buy To Let property investment.
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#1 Establish a limited company
Many individuals who own a Buy To Let property own it as a private individual. Consequently, any rental income is regarded as personal income – subject to your Income Tax Bill. For higher earners in the 40/45% tax band, this can seriously eat into the returns offered by your property. However, setting up a limited company and transferring ownership of the property to it could be a powerful way to mitigate unnecessary tax liability. Here, the rental income would be subject to corporation tax, which at 20% stands lower than the higher Income Tax bands.
#2 Claim all expenses
Tax on the income from your Buy To Let property happens after expenses are deducted. So, it makes sense to claim the full range of expenses available to you (many landlords do not). For instance, are you counting the costs incurred when travelling to and from your rental property – e.g. for inspections or tenants meetings? Are you factoring in the costs of safety certificates or subscriptions to property investment-related products and services (e.g. magazines).
#3 Submitting your tax return on time
It might sound obvious, but filing your Buy To Let information each year via tax return, by the due date, is a good way to avoid a penalty from HMRC which would eat into your investment returns. Yet many landlords do, indeed, file late. There has been more Government grace since COVID-19 broke out in 2020, allowing for later submissions. However, this understanding will not last forever.
#4 Move into the property (capital gains tax)
Thinking about selling your Buy To Let property? In 2020-21, doing so could trigger a capital gains tax (CGT) charge if the profit on the sale takes you over your £12,300 annual CGT allowance. However, Private Residence Relief (PRR) allows you to mitigate your liability if you live (or have lived) in the property for a decent period of time.
Bear in mind that this route may not work if you never lived in the Buy To Let. However, you may still be able to save on CGT if you have already used up most/all of your CGT allowance, the financial year is almost over and are willing to delay selling until the new financial year starts (when your allowance refreshes).
#5 Splitting the rent
Many individuals hold sole ownership over their Buy To Let property (e.g. a single person). Yet many choose to own jointly with others. For instance, perhaps you own a 50:50 split in a Buy To Let property, with the other half owned by your sibling. Naturally, many would assume that the monthly rent would be split accordingly, 50:50. However, there are circumstances in which this split can be allocated differently – with important tax implications.
For example, suppose you have a student son who owns 10% of a Buy To Let property (you own the remaining 90%). Each year, the property brings in £10,000 rental income. Typically, this would hand £1,000 to your son and you would keep £9,000. However, you are a taxpayer on the Higher Rate (40%) – a huge drain on the rental yields – whilst your son, as a student, does not pay any tax. In this case, there is an argument for inverting the rental income so that 90% goes to your son, whereas you keep 10%. This would bring in £9,000 per year to your son which will be exempt from tax, since it falls under his £12,500 personal allowance.
According to HMRC’s Property Income Manual (PIM 1030): “Joint owners can agree a different division of profits and losses and so occasionally the share of profits or losses will be different from the share in the property.” As such, it may be wise in the above scenario for the parties to sign a written agreement stating the allocation of profits – at the start of each tax year. Bear in mind that these rules do not apply to owners who are married or in a civil partnership.
Buy To Let investments have become more complex due to COVID-19 as well as tightening restrictions that were happening prior to the pandemic. Yet they can still be very worthwhile in the right circumstances, and for investors with specific financial goals.
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or firstname.lastname@example.org