Quid Game: Six Tax-Planning Wins for Landlords
Prepping Pays Off: How to save on your tax
Ah, a less expensive 2023 – wouldn’t that be good?!
When it comes to tax planning, there are always opportunities to save money. But what are they, and how do you know which ones are best for you?
Whether you’re a novice or veteran, get ready for plenty of food for thought: Tax pro Richard Cunningham is back for the finale of our three-part guide on how landlords can maximise tax efficiency. This time it’s all about tax planning.
What are tax planning opportunities?
Effectively it’s about arranging your affairs in such a way as to minimise tax liability. And about doing that within the bounds of the legislation of course!
It’s true: tax planning is more of a challenge than, say, fifteen years ago, but there are still lots of ways to minimise your tax exposure on your buy-to-let portfolio. Here are six of the very best tax planning tips for landlords.
1. Get the basics right!
One thing Richard swears by is a solid foundation. By that he means:
- Get your allowable expenses sorted (we covered this in our allowable expenses episode). This means you can write off anything you’re entitled to write off
- Find the optimal split between income and capital (check out our episode on holding structures)
2. Couples: Think about splitting
Bet that got your attention! Before you pack your bags, what we mean here is how an asset is divided. Let’s use a hetrosexual married couple:
The situation: A husband and wife jointly own a property portfolio. One has a high salary and is paying 40% tax. The other’s on a lower salary and basic rate tax, not using all of their personal tax-free allowance.
The solution: Rather than stick with the default split in ownership of 50-50, the couple altered the ratio to give the lower-earning partner a larger share. This means less tax paid on the portfolio’s income, and more cash in the couple’s pocket.
This works for civil partners and unmarried couples, as well as friends, business partners and siblings who may have jointly inherited a property.
3. Use a limited company
Limited companies can be particularly useful when a landlord has a partner and kids.
We’ve talked a bit about these before when we looked at how the way your property is registered can affect your tax bill.
When it comes to tax planning, two examples come to mind:
Personal Tax Free Allowances
It’s not something the average person thinks about a lot, but children aged thirteen and over can work, and therefore they have a personal tax-free allowance.
Of course, with school keeping them rather busy, the chances are they’re not using it fully, if at all, so getting some of that income into the kids’ hands means less tax exposure. Limited companies make it easier to make the most of such opportunities.
A word of caution though: If you get it wrong, it can get very expensive. If you simply give the kids the money, you could end up getting a tax bill. There are workarounds, but this is why it pays to use a chartered accountant and we recommend that you get professional advice before taking this route, to ensure that you are doing everything above board.
Share the wealth
Did you know that setting up a limited company for your property business can soften the inheritance tax blow?
With a limited company, you can set up different classes of shares – let’s call yours A, while your kids have B shares. You can give the B shares a ‘right to growth’ while freezing the A shares. When the company grows, only your kids’ shares will grow, and this reduces your exposure to inheritance tax.
4. Repairs rescue
Everyone reading this knows only too well that repairs are some of the biggest expenses that landlords face. Can tax planning help?
There is a way to accelerate the relief on expenses. It depends on how you’re taxed for your portfolio, and this one only works with the second option:
- Cash basis: This is what it sounds like. You’re taxed on what you receive in terms of your rent, and what you pay out in expenses.
- Accruals basis: Rather than what you get, this takes into account the future beyond that tax year.
Let’s walk through an example of how accruals can ease the pressure of repairs.
The situation: You’re biting the bullet. You’re replacing all windows and doors on one of your properties. You’ve entered into a contract with a window fitter and paid the 10% deposit, but the other 90% isn’t due until next tax year.
The solution: The fact you’ve made a commitment means you can accrue the 90% within the current tax year, so you get the tax relief on 100% of the expenditure much sooner than on a cash basis. And getting any benefits sooner is always going to be better.
5. Invest in enterprise
Have you heard of the Enterprise Investment Scheme? It’s a new government scheme, but what exactly does it do?
The situation: You sell one of your portfolio properties and you’ve made £100K profit – hooray! The less good news is you’re liable to pay 28% capital gains tax on it.
The solution: Instead of paying out the £28K tax, you opt to put that £100K in an EIS-qualifying investment. The capital gains tax is deferred for the length of that investment.
With EIS, you still have to pay the capital gains tax bill if and when you divest from the scheme, but it gives you a breather, and you could see some returns. Amid the cost-of-living crisis and mortgage rate hikes that could be a lifeline.
6. Could you save stacks with a furnished holiday let?
A few hoops to jump through with this one, but for some landlords, switching to a FHL will bring big tax savings.
First, what makes a property a furnished holiday let?
- Availability condition: The property has to be available for let at least 210 days per year
- Letting condition: It has got to be let for more than 105 days a year, and it shouldn’t be let to one person for more than 31 days
- Pattern of occupation condition: In simple terms, the pattern should be one of short-term lets
How are holiday lets taxed?
There are a few – rather cushy – tax reliefs for owners of FHLs:
- Mortgage interest relief. Owners can write off all mortgage interest
- Business asset disposal. 10% entrepreneur’s relief rather than 28% capital gains tax if you sell your property on
- Inheritance tax. Some holiday lets are exempt from inheritance tax (though less and less as time goes on)
A key tax message for landlords
Get yourself a good accountant. There’s only so much you can take from going online as everyone’s situation is different.
Accountants and tax advisors are the people who know the rules inside out and can give you sound advice. They’ll usually offer a free initial consultation too.
You can catch up on Richard’s sage advice from parts 1 and 2 of the series now, here:
The Mashroom Show will be back in 2023 with plenty more unmissable advice. See you there!In the meantime, join the Mashroom Landlord Community on Facebook, and you can find us on all the other socials too.