It goes without saying that as mortgage brokers, your primary role when dealing with landlords will be getting them the best mortgage deal possible across their portfolio.
The savings made through your hard work may sometimes be offset by many landlords paying too much tax. So, what are the key tax areas that any landlord should know about if they want to pay the least possible tax?
Property ownership
Firstly, it’s important to take ownership of the property into consideration. For properties that are jointly owned, the rules are a little more complex than for those owned by a single investor.
Landlords must ensure the income from the property is shared in the correct way. If they are not married to the joint owner, the income can be shared any way the owners choose, and the tax split follows the actual split, even if the beneficial ownership is in different percentages.
This can be beneficial for landlords who are supporting offspring at university, as they can give them income to be taxed at their own rate, without giving them more than a small percentage of the property.
For married couples, there are a few more limitations: they can only share the income 50/50 or in the actual ownership percentages, and only then if they give notice to HMRC (on Form 17) before the start of the tax year.
However, on the upside, married couples can transfer property interests between themselves with no capital gains tax.
It’s also worth informing your client that if the property qualifies as a “furnished holiday letting”, it may be possible to get Entrepreneurs’ Relief when it is sold, bringing the Capital Gains Tax rate down to 10%.
If there are several such lettings, but only one is being sold, then planning between spouses can still give access to this lower rate of tax.
Keeping records
HMRC is currently targeting small businesses over record keeping and landlords are no exception.
You should encourage any client looking to buy a property for buy-to-let purposes to keep proper records. Good records are doubly useful: in addition to avoiding hefty fines, they make it easier to identify deductible costs.
So, what are these deductible costs? Some landlords may not realise where they could be saving money, so here is an overview – as well as some tips that many of your clients will be unaware of.
Firstly, mortgage interest on the property or portfolio of properties can also be claimed. In addition, if your client extends the mortgage on their own home to buy the rental property, they may be able to claim some of the interest paid on that loan as well.
Landlords should also be aware that repairs to their property, even significant ones, can be claimed as expenses and even minor elements of improvement may be claimed as repairs. This will be particularly useful if the property is in need of work when purchased.
On an ongoing basis, if the property is let furnished, the costs of the furnishings are not deductible, but a ‘wear and tear allowance’ based on 10% of rents may be claimed and is often more beneficial.
Even if ‘wear and tear’ is claimed, certain repairs and replacements can still be claimed as well.
If none of the above is news to you or your clients, here is one that’s often overlooked.
Most expenses are fairly obvious, but are your clients claiming for visits to check the property?
If the trip is purely for the property, business travel costs or mileage can be claimed. However, if it’s a holiday home as well, they may struggle to claim two weeks in the sun as an ‘inspection visit’.
Overseas residence and capital gains tax
Where landlords are not resident in the UK, it’s important to comply with the non-resident landlord scheme.
Without joining the scheme, the tenants or agent are required to deduct 20% tax from the rent and pay it to HMRC, not the landlord. This means landlords could be paying tax on their expenses until they submit their tax return in order to get a refund.
Finally, if the property has been or could be a personal residence, then the landlord may qualify for ‘principal private residence relief’, topped up with up to £40,000 of ‘lettings relief’. This can also be doubled if the property is owned jointly.
The principal private residence relief and lettings relief can be very valuable and can be claimed on more than one property. Provided the facts fit, ‘flipping’ between two or more properties is not just for MPs.
Bottom line
Although finding a great deal on a mortgage will lead to a happy client, having an understanding of how landlords can save on tax can also come in handy and add value to the service you provide.
For more information on some of the areas covered above, HMRC offers guidance on tax claims in their ‘Property Manual’.
However, if your client wants to make the most of all the tax deductions, you should consider introducing them to a professional. There are penalties for getting things wrong and an advisor can ultimately save your client more money than they cost.
Tony Bernstein is from chartered accountants H.W. Fisher & Company
