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Buy To Let has been a popular investment choice for many people in the UK for years. Lately, however, property investors have found themselves facing increasing pressures on their profits and caught out by numerous new tax rules. For honest investors seeking to generate a return whilst offering tenants a place to live, this can be a dispiriting and frustrating experience. Below, our team at Cedar House offers some information and insights to help landlords get a better tax deal in 2021-22 and mitigate taxes which erode their Buy To Let investments.
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Ways that Buy To Let is taxed
There are two common ways that tax is levied on Buy To Let properties. Firstly, rental income is subject to income tax. For instance, if you generate £12,000 from your tenants in a given tax year and do not receive any other income (e.g. from a salary), then this falls within your 2021-22 personal allowance (£12,570) and should not be taxed. However, if you also receive, say, about £45,000 per year from employment then this, and your Buy To Let rental income, will both be subject to income tax. Secondly, unlike your main residence, Buy To Let properties are subject to capital gains tax (CGT) rules when sold. For Basic Rate taxpayers, the CGt is 18% on profits generated from the sale – whilst it is 28% for those on the Higher Rate.
Mitigating income tax
It used to be the case that Buy To Let landlords could deduct mortgage expenses from rental income. 2021, however, is the first year where this is no longer available, leading to a huge cut in profits for many landlords – especially those in Central London. Instead, a tax credit system has been brought in, set at 20% of your mortgage interest payments. This is bad news for those on the Higher Rate who previously enjoyed 40% tax relief on mortgage payments under the old rules. To give an example, prior to 2017 a Buy To Let landlord on the Higher Rate bringing £950 in each month from her property – involving a £600 mortgage – would have paid £1,680 in tax. From April 2021, however, this figure would be £3,120, almost twice as much!
Sadly, there are limited strategies open to reduce this. One might be to rearrange your finances so that you move from the Higher Rate band to the Basic Rate, although this is likely to detract from your overall income. Another – perhaps more feasible – option might be to consider putting your Buy To Let investment(s) inside a business structure. This would place it under corporation tax, which is set at 19% in 2021-22 (lower than income tax). Those landlords with multiple Buy To Let properties could even consider putting them in a special purpose vehicle (SPV). If you are considering these routes, be careful to seek financial advice first.
If you are considering selling your property, be careful not to get caught out by tax rules. From April 2020, for instance, you must declare your property sale and CGT liability within one month of completion – otherwise risk facing a fine. Also, be aware that there have been recent reports of a flaw in HMRC’s HM Revenue & Customs system, which does not automatically match up with yearly tax returns. This has led some landlords to pay CGT twice when selling a property, seeking refunds later. You may need to have a buffer ready to allow for this risk.
Two immediate strategies spring to mind when looking to mitigate CGT on Buy To Let sales. Firstly, consider getting the most out of your £12,300 CGT allowance which renews each year. If you have already used up all/most of it in 2021-22 (e.g. by selling shares for a profit in a general investment account), then could you postpone the property sale until next April? Secondly, if you are married or in a civil partnership, then consider combining your CGT allowances to minimise unnecessary tax. Remember, HMRC regards a married couple as separate individuals for tax purposes. If you both own a mutual interest in a Buy To Let property, therefore, you can both use your CGT allowances to shield up to £24,600 in capital gains when you make the sale. If one of you has used their CGT allowance for the year and the other has not, consider whether you could make use of both allowances in the following tax year by delaying the sale.
Buy To Let can still offer some compelling opportunities to grow wealth and generate returns in 2021. Yet the pressures on landlords are real and keenly felt. Make sure you make the most of your tax allowances and position, considered under guidance from a financial professional in this complex and ever-changing area of financial planning.
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