Landlord Tax Webinar Transcript
Introduction
Naveen Jaspal (NJ): So, thank you all for joining us today. We hope you find today really useful. So first of all to introduce us, you can currently see on the screen our pre-lockdown photos, and shortly we will have our cameras on and you’ll be able to see us all and the consequences that lockdown has had on our appearances. But to start off with, my introduction. I’m Naveen, I’m the COO of Mashroom, I’ve been an estate agent for 15 years but most importantly, I’m also a landlord. So that’s me.
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Agenda
NJ: Thank you. So, the agenda today then. So just to go through the topics we’ll be covering. I think number one, it would be remiss of us not to talk about the budget. And, the next questions have all been decided by you, the audience. So, the first question is can I offset all my expenses against rental income? We’ll then discuss, how is tax calculated when you sell your property, so Capital Gains Tax. What is inheritance tax and how does it affect me as a landlord? Should I hold my properties in a limited company? We’ll discuss our top tax tips, then we’ll go to questions, so please, you’ll see on your screens the ability to ask us questions. Put them in throughout the whole of this presentation and we will get to as many as we can and then we’ll be able to show you how we can help you next going further.
So, I promise you before I get started and before anyone’s heart sinks, this is not a sales plug. I think we’re all here for the same reasons today, and I’m certainly here for the same reason as every landlord on this call. In the last ten years, thanks to the Government, being a landlord has just become so much more expensive and in some instances it’s almost become unprofitable. If you add up all the regulations and the taxes, I think the question is how do we deal with all of that and that again is what we’ll be speaking about today. And in reality, you know, most of us landlords, you know, we bought into property as an alternative to our pensions. How do we enable these properties to continue to provide a passive income in the long term, despite the government and despite the tax hikes? So, I bought my first property at the age of 21 and I’m sure like most of you in the last year I have become really concerned if this is ever going to fruit the profits I wanted it to do so. And that’s when I really reached out to Simone and Chloe and they gave me such great advice that I thought well why don’t we go and share this with the wider landlord community, because I think we all need to know how to understand how to make property profitable again. We know we don’t want the high costs, we know that it’s all eating into our profits and you know, the budget on Wednesday, you know, whilst it was great and Rishi does seem to have an ability, you know this license to print money at the moment, he did make it clear that we were going to have to pay this money back and the first thing I thought was, well who is going to be paying this money back? Well, it won’t be the super-rich, because let’s be honest, they’ve already found ways to become tax exiles. It’s going to be us, you know, the middle-class landlords. And my view is that we kind of need to become savvy now and continue to become savvy so that we can help ourselves through this ever-changing landscape. So, let’s get started.
Budget Update
NJ: So, the budget. Chloe, Simone, what were your thoughts?
SB: Shock! Where were all the Capital Gains changes we were expecting?
CG: Sorry, I was just going to say that we’ve been advising people to be proactive and be ready for those changes but they just didn’t come, did they?
NJ: Literally, you know, there were no tax changes, in terms of that, but there were so many other great things that were there, and I think the key part is to any landlord, let’s be realistic, it’s coming, but if we just pick up on some of the top points; the introduction of the mortgage guarantee scheme. So, whereas, you know, okay, we do know as a landlord you can’t go and necessarily take advantage of it for the purchase, but there are ways that we can use the mortgage guarantee scheme to enable us to grow equity within a property personally, and then we can go on to use that money thereafter. But, I think we’re definitely going to touch on that later on and I know we’ve already had some questions to answer about that. So, yeah, I think the mortgage guarantee scheme is really interesting.
CG: Yeah, definitely. Another point that was announced was that the current stamp duty relief has been extended. It was due to end at the end of March but it’s been extended to June. So that’s just given us all a bit of wiggle room, if there are any deals underway at the moment, you can rest a bit easier that you can get it in before the changes come back in. I’m sure a lot of you have already taken advantage of the relief, but you might be able to sneak in one last deal as well. It’s given us that opportunity. The other changes I suppose I’ll touch on, yes, there haven’t been a lot of tax changes, a lot of rates and allowances have been frozen. So, the personal allowance when that goes up next month, that will then be frozen at the rate of £12,570 until April 2026. The high rate bracket threshold will also freeze at £50,270. A nice round number for us all to work with for a few years. Whilst this might not sound groundbreaking, it might mean that we are going to pay more tax in future because obviously, as income goes up, as rental income goes up with inflation, those amounts are frozen so more of us are going to fall into that higher rate tax bracket. Capital Gains Tax, that’s also been frozen, £12,300, again until April 2026, so more of our gains are going to become taxable, unfortunately.
SB: Yeah, he pinned it as taxes aren’t going up but if you freeze the rates and allowances when generally they would increase, then I suppose a little bit taxes are going to go up to a certain extent. But to leave it to me to bring the bad news in. The one thing that wasn’t frozen was corporation tax, quite surprisingly, because they’ve spent a few years trying to push the rates down to be one of the lowest. So, from April 2023, we’re looking at a corporation tax rate of 25%, but he was quite nice I suppose in a sense, that for smaller businesses if your profits are below £50,000 you’re still going to stick at the 19% Small Companies Rate and if your profits are between £5,000 and £250,000 you won’t go in at the full 25% rate, there will be a bit of tapering. So it’s not all doom and gloom, on the corporation tax front.
NJ: No, look I think, you know, as you said Simone, you had to deliver the bad news- I’m sure that’s not hard for you being a Tax Accountant! You’re very used to delivering bad news. But, all in all, it wasn’t a bad budget and I think that there is now time to make hay because the change will be coming. And Chloe, you’re absolutely right now is the time for you to buy. Okay, we still have to pay some Stamp Duty as a landlord but it’s far reduced from what we would have been spending previously. So, you know, it really is about A) trying to become as tax efficient as we can now but also, you know, there is an opportunity for us to go out there into the market as much as we can before these changes then come back into play. So, I think we should get started on the first of our topics really. So, the first one was over to you Simone. Can I offset all of my expenses against a rental profit?
Can I offset all my expenses against a rental profit?
SB: You would think that the answer to this would be yes, because why wouldn’t you spend money on your rental property unless you really needed to and it was allowed as an expense. But there are a couple of areas where that generally isn’t the be-all and end-all of the rule. So, from a basic standpoint, your expenses have to be wholly and exclusively for the purposes of renting out your property. It doesn’t generally have to be incurred when you have a tenant in. There are rules that let you claim either when you’re first starting out or if you’ve got a gap between tenants, but there are two big areas that I want to look at. The first one, which I suppose most of us will know about is the mortgage interest restriction. You used to be able to treat it as a proper expense, if you will, and offset it against your rental income. But, over the last few years, HMRC have been tapering that away. So now rather than getting full tax relief against your rental income, which could result in a tax dedication of up to 40 or 45%, it’s now capped at 20% deduction, which isn’t ideal and could sometimes leave you with a bit of a cash deficit in terms of the rent that you’ve got coming in isn’t enough to pay all your costs and your tax, now that the mortgage restriction has come in. The big one, and one of the ones that I think affects the most people is repair work, because repairs strangely enough aren’t always repairs. It’s a repair if you’re bringing something back up to its original standard using a modern day equivalent material, and in that case you would offset it as an expense against your rental profit. So, a good example of this that HMRC use in their own guidance is replacing a single glazed window with a double glazed window, that’s a modern-day equivalent. If you add something that wasn’t there before or alter, improve or upgrade something then, even though in your mind that might be a repair cost, it’s actually classed as an enhancement expenditure and enhancement is offset against the selling price of your property when you come to sell it. So I know Nav, you’ve been caught by this personally. If you replace a kitchen with a new kitchen and stick five or six extra units in that’s an improvement because you’re adding something that wasn’t there before, so it’s an enhancement expenditure and it wouldn’t be offset against your rental income. This can make quite a big difference, because when you’re spending this kind of money, you would think you could offset it against your rental income.
How is tax calculated when I sell my property?
The other big thing that I want to talk about how you actually calculate the tax when you come to sell your property. So, I’ll just run through the quick list of how you would calculate it. You would always start with the selling price, which is what you sell your property for. And then you can knock off several costs that you’ve incurred with the property. So the first one is any costs associated with when you sell it. Think estate agents fees, solicitors fees. The actual purchase price of the property, or the value of it when you inherited it if that’s the case. Any costs when you purchased the property, thinking again solicitors fees, stamp duty, bank transfer fees. This is when you would deduct your enhancement expenditure, and that would bring you to a gain. So, for a company that is the figure that you would pay tax on. But for individuals, there are a few extra reliefs that you can claim that not everyone is aware of. The first and the biggest one is called Principal Private Residence Relief. So, if you’ve ever lived in that property you would time-apportion the gain and the time period that relates to the period that you’ve lived there is actually exempt from tax. So, it can end up being quite substantial relief to claim. There is another relief called lettings relief which used to be amazing because you could get an exemption of up to £40,000 if you’d lived in the property and then rented it out. Obviously, if things are too good to be true, HMRC normally gets rid of them so now you can only claim lettings relief if you’ve lived in the property at the same time as the tenant. So, it’s hard these days. Hardly anyone’s going to qualify for this relief so bye bye to that. That gives you a chargeable gain figure so if you’re an individual you would then deduct your annual exemption which, like Chloe said is £12,300 and that would give you your taxable gain and that’s the amount that you would pay tax on. So that’s broadly how you would calculate the gain. Companies pay tax on the gain at the corporation tax rate which is 19% and individuals pay tax capital gains rates which can be quite different. So if it’s a commercial property the rates are 10 and 20% depending on how much of your basic rate tax band you have left. But for residential properties it’s 18% or 28%, and those were the rates that we thought were going to go up in the budget but there was no mention of them at all. The craziest thing that I need to tell everybody about is that you now only have 30 days to tell HMRC that you’ve sold your property which is insane because you’ve got everything else going on and you’ve also got to pay any tax that you owe in 30 days and so many people don’t know about this change to the rules. Solicitors don’t seem to be telling people, some estate agents aren’t telling people, sorry Nav, not picking on you! So, if you’re resident in the UK you only need to declare it if you make a profit and have tax to pay, but if you’re not resident in this country you have to tell HMRC in 30 days regardless of whether you’ve got any tax to pay, and they do actually issue penalties, which is crazy. And they’re so hard to appeal against, even if nobody has told you about the rules, HMRC’s opinion is that you should just know about the rules. So, if that’s the only thing that you take away from today please just think and ask someone whether the 30-day rule applies to you if you do decide to sell a property.
NJ: That’s massive, Simone, because you broke that news to me yesterday and I’m midway through a sale at the moment and I had no idea that I had 30 days in order to declare. I think, you know, in summary of everything you’ve gone through Simone, you’ve gone through two of the big topics. So, you know, expenses and then how the tax is calculated at the end. But it’s all about actually maintaining your receipts, keeping hold of your costs and really having a handle on it. And I think that if I think back at 21 year old me as a landlord who’s buying a property, and I’m sure there’s loads of landlords who are listening to this now and you know, sometimes it’s very hard to keep control of the receipts, you know you might go and change the windows and that’s a big receipt so you might say okay I’m going to hold onto that but it’s every little receipt that you should be holding onto, because at some point it might not be on your annual return but it will be in your Capital Gains, you will be able to claim back those expenses. Thank you Simone, I think that was really, really interesting. So now we’re going to hand over to Chloe. So Chloe’s going to discuss with us inheritance tax and how it affects us as landlords and then she’s going to go on to, and I know this question, I’ve seen the comment section, has been asked about ten times already, she’ll then go onto explain the benefits or the pros and cons of popping your properties inside a limited company. So, over to you Chloe.
What is inheritance tax and how does it affect me?
CG: Thank you. So yeah, if we start between what’s the link between IHT/inheritance tax and having rental properties and being a landlord. So, when a landlord passes away, their rental property goes into their estate and it goes into the estate and the market value on the date of death. If the total value of the landlord’s estate is under the nil rate band or if the whole estate gets passed to a spouse then there is no inheritance tax to pay. Happy days. But, if it’s above the nil rate band or passed to somebody else other than a spouse then there is potentially inheritance tax of up to 40%. So, we really need to be thinking about what we’re doing with our portfolio. Perhaps, even before we start our portfolio. But, we’re not always that proactive, so let’s start now. The first point to consider is that if you gift your property to somebody and you survive for seven years then there is no IHT to pay on that transfer. But, you need to think about whether you can afford to gift that property as a whole because when you gift that property, to qualify for the IHT relief you need to forgo all the future incomes from that property. So, if you still need the income from that property for your living costs, then that’s probably not the best idea for you.
Something else to think about when you transfer a property or gift a property is that it will trigger a capital gains tax calculation. And, if there is a capital gain on the transfer then like Simone said, the tax will be due within 30 days and it must be reported to HMRC within those 30 days as well. So, that could really affect your cash flow. Also, if you’re gifting a property with a mortgage you need to consider the lender. You need to let them know and make sure they’re happy with the transfer.
The next point to consider, which I think Simone mentioned, but we’ll just reiterate again is if you are inheriting a property, the deemed cost for you that you need to think about when you’re doing your capital gains tax planning is the market value at the date of death from the person you’re inheriting it. So, just bear that in mind when you’re thinking about capital gains.
The next point, an important aspect, is that inheritance tax is due before the beneficiaries even get their hands on the property that they have been gifted or left in a will. So this is something to think about as a potential landlord and also a landlord leaving a property in their will. You could potentially speak to your IFA, see what insurance policies there are out there in order to cover the costs on death. Or you could just start putting cash aside and then the pot is there ready to be used, so you don’t have to liquidate any of your properties. So, you may ask, is there any relief available if you have your property portfolio in a limited company? Any IHT relief? Unfortunately, the answer to that question is no. You cannot get business property relief on a rental property business as it is classed as an investment business by HMRC and unfortunately there is no BPR. But, there are other advantages of having your portfolio in a limited company. And that takes us nicely to our next question.
Should I hold my properties in a limited company?
CG: So like Naveen said earlier, changes in the budget that have been introduced have really been rough for landlords. They’ve really hit landlords hard. So, we really need to be thinking about incorporation. So, let’s just jump straight into the benefits of incorporation.
Firstly, when you set up a limited company with shares this allows for greater flexibility with estate planning. So, like we just mentioned if gifting the property in full is not convenient for you then we can give away a proportion of our shares instead, so you can still get some of the income from that rental property. And by gifting the shares, you can also avoid capital gains charges because you can gift an amount of shares each year which doesn’t exceed capital gains allowance and therefore no CGT to pay, which is obviously great. Also, with having a limited company you can set up different share classes which allows you to pay different rates of dividends to different individuals with different needs. So, for example, if you have one shareholder who is a high rate taxpayer and one is a basic rate taxpayer you might want to pay more the basic rate taxpayer to take advantage of those lower rates of tax. So then talking about different rates of tax with a limited company, if you are a high rate taxpayer and you do not need the additional cash in your back pocket you can leave the money in the company, so there’s no further implications on your personal tax. You can leave it in the company to reinvest in further properties, or you could just leave it there for a rainy day. And again, Simone said earlier, but just to really hit the point home, with companies there is no different rate of tax when you sell a property, it is all just corporation tax and as mentioned, at the moment it is 19% and that can be a massive difference to the potential 28% capital gains tax rate if you are a high rate taxpayer. Also, you get nine months and one day to pay that tax rather than paying it within 30 days if you’re holding the property as an individual.
So, if you are thinking about buying a new property, it’s probably best to consider putting it into a limited company straight away. But, again, some of us will hold our properties in individual names, so what do we need to do if we want to transfer it into a limited company, as it will trigger a capital gains calculation again? And if there is a gain there will be tax to pay within 30 days. And that is if you don’t get incorporation relief. If you get incorporation relief that means there is no capital tax to pay on that transfer at that point. In order to get incorporation relief, you must be already running a rental property business. So that means you must be spending, HMRC kind of say 28 hours a week managing your portfolio. That’s then seen as a rental property business and you can get the incorporation relief. This really is a case of quantity of properties is more important than quality of income.
So, if we are going to incorporate then there are a few other things we need to think about. Stamp duty, it will be due on the transfer of properties to a limited property. You might want to consider if the private principal residence relief that Simone talked about earlier, whether you need to forgo that. Is it cost effective? And also, if you have got mortgages on your properties, what will be the charges to transfer those properties into a limited company. Also, there are often high rates and fees for limited companies rather than holding them in your personal name. So, my advice is don’t rush into anything, really consider all the angles that we’ve talked about before making a decision basically.
NJ: Thank you Chloe. The chat and the Q&As have gone wild during your section. It’s definitely what people are really interested in. You know, inheritance is a really big thing as a landlord, you know, look, you know if you’ve got children you’re becoming a landlord because ultimately, okay you want your pension plan, but you don’t want to, you know, pass away and your children to end up with this huge burden of debt, of, you know, not being able to take over the mortgages, you don’t want them to have the issues, so a lot of people asked about the trusts and you know, there will be a lot of questions we can go through and if we don’t go through them today, Chloe will be available thereafter to answer all these questions. But, you’ve definitely lit some fires and same with the limited companies, you know, it’s a big conversation topic at the moment because you know, and this might answer some of the questions that have come in, but if you currently have the property, there are costs of putting that property inside a limited company. So, it’s kind of thinking forward as opposed to retrospective. So, if you’re joining us and you’re a landlord who has just started out on your journey, great! If not, don’t worry, but it’s about thinking forward and planning forward as to how you handle this going on. Thank you Chloe.
CG: Sorry, just a quick point. Everyone’s situation is definitely bespoke so we’ve not just got a blanket rule for everybody. You do really need to look into it for your own specific circumstances.
NJ: I think that’s really important Chloe, because tax is bespoke, you know, that sounds really weird to say that but actually depending on who you are… Simone’s laughing, she’s back to the ‘legally’. ‘What’s legally possible?’.
SB: It’s definitely bespoke.
NJ: I’m not changing out the legal part but it is bespoke and absolutely, I think there are going to be so many more questions, so Simone, just to make sure we have got enough time to go onto questions next, and we will be going to questions after this, Simone, give us your top tax tips.
Top Tax Tips
SB: I’ve got five. Five top tax tips.
NJ: You can have five!
SB: Thanks! Some of these people might already know about so I’m just going to rattle through them, but if you’ve got any questions please feel free to put them in the Q&A.
So, my first one is, if you own property with a spouse you’ll probably already know that HMRC just expect you to split everything down the middle, you’re paying tax on half each. But, did you know that if you actually own the property in a split that isn’t 50/50m you can file an application to have the income and expenses split, according to your own split. So, you don’t necessarily have to just go 50/50 if you’ve both got different income levels. Always an option to think about.
Number two. Have you claimed for all of your expenses? You might think that is a really stupid question to ask, because if you spend money on something obviously you’re going to remember to put it on your list of expenses. But have you thought about things that you’re not necessarily paying out in cash for? So, if you manage a few properties and you have to drive to them in your car, are you claiming the mileage for that? If you have a mobile telephone, but you’re constantly on the phone chasing tenants, arranging repair work with contractors, have you thought about claiming for a proportion of your telephone cost? There are so many things that you could claim for, that aren’t necessarily just going to go into the shop and just paying on your card, getting a receipt, putting it on your tax return. So that’s a good one.
Number three, have you claimed all of your finance charges? So we spoke earlier about the mortgage interest restriction, but it’s not actually called a mortgage interest restriction, it’s called the finance charge restriction. Because, you can’t just claim for mortgage interest. What about the arrangement fees that you paid when you were arranging the mortgage? Or, if you don’t have a mortgage on the property, but you got cash from somewhere else to finance it, maybe you took money out of your primary residence and used that to buy a rental property. Maybe you’ve got a funding circle loan for example. Interest on those loans is still available as an expense, subject to the restriction. It doesn’t necessarily just have to be a mortgage.
Number four. This is quite relevant, especially in the Covid times that we’re in at the minute. Have you had to swap to short-term lettings? If you have a rental property that is now a short-term letting, have you considered whether you are now classed as a furnished holiday let? Furnished holiday lets are classed as ‘real businesses’ according to HMRC. There are some fantastic tax breaks around, so definitely something to look into.
My fifth one is only a baby one. It might only apply to some people out there who have maybe one rental property with no mortgage. But if your expenses are relatively small, have you considered claiming the property allowance instead? If your expenses are below £1,000, instead of claiming for your expenses, you can effectively treat £1,000 of your income from your rental property as tax-free. So it could work out better to claim the property allowance than your actual expenses.
And that is my top five tax tips!
NJ: Thanks Simone! Yesterday we went through this and whilst all of the five are amazing, the one that just blew me was, you’re absolutely right, I consider expenses to be you know I’ve had to go and pay somebody to fix and issue or I’ve gone and bought a new front door or like the kitchen, as you pointed out to me earlier, thanks for that Simone. Salt in the wound. But, I’ve never considered it as absolutely, I have to use my mobile phone and I have to start calling my tenants, you know, I have to drive to the property, the properties aren’t local to me, you know, they’re about 80 miles away, you know, you add up all of that. It’s bizarre to me because my accountant, my previous accountant before yourself Simone, had never pointed this out, and this is what you opened my world to. I think there are so many landlords out there who will now start to think about all these different ways they can put against their expenses that we’ve just never really thought about or claimed for before. So, amazing, thank you very much for that Simone.
So, now is probably the part that all of our audience has been waiting for and we’re going to head straight into questions and answers.
Questions and answers
NJ: So, if we start the first one with you Chloe. Chloe, this has come from George, and George would like to know:
Could I use a trust to avoid inheritance tax on my rental properties?
CG: Potentially, yes. There may be times and circumstances when you might want to use a trust to keep a level of control if you are thinking about, I’ve just seen a few questions about gifting children properties, you might want to keep it in a trust so that they don’t run riot with your rental property. But, if the property value is under £325,000, which is the nil rate band at the moment, you can transfer that into a trust without any IHT at that point, and as long as you survive for the seven years then there would be no inheritance tax due on that introduction of that property into the trust.
NJ: I think this is massive because, you know, you either find inheritance tax, which is effectively let’s be honest, we’re talking about death. Death is either something people talk about openly or they go totally to the other end of the scale and it’s just never ever mentioned. But, you know, when we’ve discussed trusts before, you know it is about maintaining that control, because if you do hand it over to your children, you know, you don’t know who is going to come into that family and let’s be honest, I know this is a really horrible thing to say, you don’t know if that child is going to pass before you. And so, therefore, having a trust protects you from all those issues because you don’t want to pay inheritance tax on something where you’re still surviving but you’ve tried to plan ahead for your children’s futures. And I think that’s why so many people are asking about us about trusts right now, because it is a safer way of thinking forward.
SB: Yeah, I think a lot of people as well are scared to ask about trusts or to even talk about death, and I don’t want to play it down, trusts can be complicated and you do need some proper advice before you set them up, but for some circumstances especially with moving properties between families, it can be the right thing to do to get the trust involved.
NJ: It’s almost cleaner when you explained it to me yesterday Chloe, and you know, I’m sure we’ll be passing on lots of people to come and talk to you afterwards, you know, it’s a nice way of wrapping up. It is complicated, it is costly, let’s not pretend that it’s not, but long term it has its benefits and I think that’s well worth thinking about and I think half of our audience agrees with us so that’s great.
The next question I’m actually going to take, and this one is from Victoria. And Victoria has asked:
Can I use the mortgage guarantee scheme to buy extra rental properties?
So, they are referring to this as a help to buy, so let’s just take that step to begin with. So they’re saying it’s a help to buy and we know with help to buys, and they haven’t yet released full details, but you know with help to buys that there are restrictions, there are restrictions on letting the property out thereafter, so you can’t buy a traditional help to buy or use a traditional help to buy to then go and rent the property two to three years later.
However, and this is the estate agent in me, and the property side of me, there are ways to use the mortgage guarantee scheme to our advantage as landlords, and this is without breaking the rules. So, if you think about our personal residence, the first thing is, in order to buy property you need the equity, you need the money, you need the cash flow. Most the time as a landlord, you get your first property, you borrow the money, you then go and take that money into the next property, that rises in value, you take the money and you keep moving onwards, so you gear the assets.
So, the way I’ve thought about this recently if you did want to take advantage, and it’s open to everybody, other than landlords in its purest form which is buy to let, if you move from your current residential home you can take advantage of this. You buy further up the scale, so you might move from a £300,000 house to maybe a £450,000/ £500,000 house, it’s no secret that the higher up and the more value your property has, the faster it is going to grow in value and by much higher figures, so you’re not talking £20,000/ £30,000 you might be talking £40,000/ £50,000, you know, and then as you take that value and it grows there’s nothing stopping you from later on releasing that value and taking that extra equity and going to put it in other properties.
And that’s equity that you would never have had a chance to have built before because you wouldn’t have had the help to buy scheme with the 5%. So, in truth, in its purest form, no, but there is a way to look at this to help you enhance your portfolio.
Chloe and Simone, I can see you laughing at me there, because yesterday this was the conversation. We were going, can we? You know, there is a way and means of looking at everything.
SB: As long as it’s legal, I’m completely down for anything.
NJ: That’s Simone keeping me back. It’s definitely legal, I’ve looked at it. Unless they bring out more criteria we can definitely do this. And let’s be honest, our personal homes can be used to gear up the assets for buy to lets anyway. The next question is coming for you Simone. The question comes from Ryan. Ryan says:
I’ve heard they’re making tax digital and will be introduced for landlords soon. How will this affect me?
SB: Listen, when VAT making tax digital came in we were all scared! How is this going to work? People weren’t used to using computers. And you know what? Since it came in in April 2019, it’s actually turned out to be not that bad, right Chloe?
CG: Correct, yeah. It was deemed a lot scarier than it actually was in practice.
SB: Yeah, so I wouldn’t say it is anything to be scared about. It’s going to come in for landlords from April 2023, for anyone with property income of above £10,000. Basically, it just means that you’re going to have to keep your records digitally, but you’re going to have to do it on compatible software. That means you can file directly to HMRC’s computer systems.
I suppose the big thing is that instead of filing once a year, you’re probably going to have to file once a quarter now. So, let’s not lie, it might take you more time, there might be a couple more costs involved, whether that’s buying software or paying an accountant to help you out with it. But, there are some really good advantages to it.
You’re going to know how your business is doing on a quarterly basis, rather than always looking at historical data at the end of the tax year. It’s probably going to reduce tax errors because you’ll be using software that has validation checks within it. And at the end of the day, it’s HMRC’s initiative to modernise the tax system. And does anyone think that the tax system doesn’t need modernising? I’m totally down for making tax digital, let’s all get on board.
NJ: I’m in the property industry and I think everything should be more modernised. I think it’s mad that we’re in 2021 and more of this isn’t digital. You know, we’re in a world where, you know, you order something from Amazon and it comes the very next day, or the same day sometimes. We should make everything as accessible as we possibly can.
SB: Definitely. I’m on first-name terms with my Amazon man! Let’s get it all online.
CG: Yeah, embrace it guys. Embrace it!
NJ: Perfect! Brilliant! The next question is, Chloe I think this actually one for you, it’s from Andy.
Is there any way to know that my partnership would qualify for incorporation relief?
CG: It used to be that you could contact HMRC and get an advanced assurance to confirm that they are happy with everything and that you would be able to get incorporation relief. But, unfortunately, I think they were getting so many requests, as with HMRC they just couldn’t deal with it so they’ve actually stopped doing that now. So, unfortunately, no. There’s no way to know. Obviously, you can get the best advice possible from someone in the know but HMRC will not confirm that in advance.
NJ: Thank you Chloe. The next question, it was almost written for me if you like, and this has come from Sandeep. And it couldn’t have come at a better time. Sandeep has asked:
When will I know if it’s the right time to sell my property?
Well, I’m currently in this situation myself. I purchased a property four years ago now and I lived in the property for two years, and I’ve had it rented for two years. I never bought it to rent it out, you know, it was meant to be a residential home, it was a residential home. Then I decided to move up north and so I rented the property out. And it was something I really had to consider, when was the sweet-spot for me? And, A) I’d lived in there for two years, if i sold the property now I could expense back all of the money I’d spent on the property, including the kitchen, but only at capital gains.
For me that became a sweet-spot, because if you are in this situation as a landlord and your property, or you became an accidental landlord by being… or taking advantage of let to buy, there will come a point where you’ve got to question, should I sell now? Should I take my money out? And you can take the money out to buy true investment properties, so properties that were always meant for you to then pass them to tenants.
So, I do believe there’s a sweet spot. You know, you should go and speak to the, you know, your accountants, you could go and speak to Chloe and Simone, if you think or are questioning: should I sell now? Go and get that advice, and they’ll be able to advise you the best way forward because they certainly advised me. So, there you go. You couldn’t have come up with a better question there!
The next one is a question from Julie. Simone, I think you’re probably the best place for this one.
If the incorporation tax increases to 25%, should I take properties out of my company?
SB: This is one of those questions where the answer just isn’t straight forward. There is no yes or no. It’s all going to depend on everyone’s individual circumstances. If you’re a company that’s going to be on profits below £50,000, and you’ll be at the small companies rate of 19%, you might be fine carrying on with your new company. But, if your company’s going to go up into the 25% band, it could be time to consider taking some of the properties out, and making sure you’re using all your personal bands first because the basic rate band for income tax is only 20%. Just please don’t make any rash decisions, anyone! Like Nav said for the last question, really you need to approach somebody and ask them to try and calculate for you what’s going to be best for you.
NJ: And it is all about information, you know, it’s such a minefield. I’m really glad about some of these questions, they’re absolutely brilliant. So, we’ve had some more questions come in.
Kamal has asked is the stamp duty holiday only on the first property, or on your first purchase? I’ll take this one. No, it’s not. The stamp duty holiday is there for us all to enjoy, and I can actually knock off Claire’s question at the same time with saying; how is stamp duty really beneficial to us as landlords as well? So, first of all, if you’re moving to your residential property, you’re stamp duty exempt, okay so, join this holiday up to £500,000 until July you don’t have to pay, up until October £250,000. So, how are landlords benefitting? Well, we only have to pay the percentage increase. So, I recently just bought and I’ve just had to pay the 3% increase as opposed to the full 5 / 6%. So, I know it’s still, I know we’re still paying stamp duty but we’re paying a reduced rate so it’s still a good time to go on and go and buy and purchase your onward properties.
The next question then is from Craig. Chloe and Simone I’ll let you battle this one out, who’s going to take it. Is the 30-day reporting requirement, this is from the date, I assume this from the date of completion? I’m assuming he’s referring to capital gains. So, the 30 days, is that from completion?
Does the 30-day period for reporting CGT start from the date of completion of my sale?
SB: Yes, definitely. 30 days from completion. No longer. Please don’t get a penalty. They just upset me so much!
NJ: Simone, you better make sure I don’t get this! The pressure is on. There’s a question from K Laly:
Will I pay Stamp Duty if move from an individual portfolio to a LTD Co.?
CG: Yes. There is Stamp Duty due on the market value of those properties that you transfer into a limited company. There are some different rules if it is a commercial property, but again, it depends on your specific circumstances.
NJ: There’s a brilliant question in from Russell. And Russell asks: can you move into a rented property (with no Buy-to-Let mortgage on it) for a set amount of time before you sell it to avoid Capital Gains Tax. I was thinking about moving into each of mine for 2 years. Is this allowed?
Can I move into a rented property with no Buy to let mortgage on it for a set amount of time before I sell it to avoid Capital Gains Tax?
SB: I love this question. It actually gets asked more often than you would think. So, when I was talking about how you calculate Capital Gains Tax, we touched on Principal Private Residence Relief. So, it’s not the case that if it has been your private residence, it’s just tax-exempt no matter what, you would still need to time-apportion it, but in order to get Principal Private Residence Relief, there isn’t actually a set time period that is okay by HMRC. It’s all about the quality of your living there, if you will, rather than the quantity of time. So, if you are registered with your doctor’s surgery at that address, if your library card or your bus pass is an example some people like to use, is registered at that address then you’ve got a good case for PPR. I wouldn’t say one particular time period is automatically going to make everything okay. Like a lot of these reliefs and calculations, I would suggest you look at it in terms of your specific scenario, rather than relying on a particular amount of time being okay.
NJ: Brilliant, thank you Simone. Dipak has come in, again with Capital Gains Tax.
Is it possible to transfer a buy to let property into a limited company every year to get Capital Gains Tax allowance?
CG: Yes!
SB: Absolutely.
NJ: I didn’t know that. That’s really clever! Tell me.
CG: So, obviously you’ve got your Capital Gains allowance every year of £12,300 that renews. So, if your gain falls under that threshold then yeah, if you’re happy to wait and do it over time then you can definitely do that.
NJ: Brilliant. Karen asks: where can we find all the things we can claim for?
Where can I find a list of everything I can claim on my tax return?
SB: You might think this is a silly question, but there is actually a list on HMRC’s website. It’s by no means a full list of absolutely everything you can claim for, but it is a good starting point because it lists sort of the top expenses you would always expect a landlord to have. Buildings insurance, repairs, mortgage interest; things like that. So, go and have a look. If you want to know about a few more of the obscure ones, then by all means take our contact details down at the end and drop us a line.
NJ: Following on from that and Bikram is a man after my own heart here.
Can you buy or leas a vehicle to manage such regular visits for your portfolio and claim this back?
That’s a good question.
SB: I’m going to jump in on this, sorry Chloe, I feel like I’m taking over.
CG: No I was letting you go! I know you love this.
SB: I always come back to HMRC’s own guidance on this. Is that expense wholly and exclusively for the purposes of managing your rental property? Are you really going to be only driving to the rental properties in this leased car? How many properties have you got? How many trips do you need to make? You’ve got one property that’s round the corner from your house, probably not going to get away with it. Got 50 properties all over the country, could potentially have a better reason for claiming. But at the end of the day, it is are you comfortable that that is wholly and exclusively for the rental properties.
CG: And, if you’re leasing that through a limited company, you need to think about benefit in kinds, as well and extra tax. If you are using it personally, there would potentially be another tax charge for you and for the company
NJ: Perfect, thank you very much. Lynda asks:
What if I die within the seven year window after having gifted property to a family member?
CG: The property goes into your estate with the rest of your assets, unfortunately. There used to be taper relief but that’s not a thing any more, so yeah, full amount goes into the estate and is taxed at the relevant rate.
NJ: I think that’s why trusts are becoming more and more important, at the moment, aren’t they? Especially as a landlord with a portfolio.
CG: Yes.
NJ: Ray asks,
If you put a rental property into a trust can you still receive the full rental income?
SB: I’m going to say not really. The whole point of putting a property into a trust is to get it out of your hands, if you will. To get it out of your estate for Inheritance Tax purposes. If you’re still receiving the income then you haven’t actually got rid of the property, effectively. So, I’m going to go for no.
CG: Yeah, it’s like we said before, you’ve got to forgo all those future incomes. Obviously, when you set up the trust you dominate your beneficiaries and I suppose it goes to them.
NJ: This is going to be our final question, but I promise if you have asked other questions we will come back to you over the course of the next week, so I do promise that. But Maggie’s final question then is:
If one has paid the Capital Gains Tax already and later the same year sustains a loss on another property, will they be able to offset it?
SB: Good question! Yes, so when you submit the return within 30 days, you aren’t going to know at that point what your figures are going to be like for the full year. So, even though it’s a return, really it’s a best guess estimate. So, if you make losses afterwards, I mean, you’re still going to put these on your tax return at the end of the year, so you would just recalculate at the end of the year on your tax return. I’ve never seen it happen in practice. I assume you would be able to claim a refund of the tax you’ve already paid.
CG: It’s a payment on account, isn’t it?
SB: Yeah.
CG: Like you would do if your payments on account, if you’re taxed over £1,000. So, it’s just in advance and if you’ve overpaid obviously you should be able to then get it back from HMRC.
NJ: Thank you Chloe. Thank you Simone.
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