Throughout 2017, we’ll be looking in some detail at the different tax considerations and obligations that landlords will encounter over the lifetime of their property investments. For this month, a general overview.
How, when and how much you are taxed depends on the way you own and make money from property and the extent to which you’re able to benefit from certain allowances and benefits. You need to understand what’s best for your own circumstances, take expert advice and make sure you have a way of keeping up with legislative changes that could affect you positively or negatively.
The first thing to clarify is whether you plan to simply buy, hold and let out your property investment, or whether you’re intending to build or renovate and then sell right away, because the two are viewed differently from a taxation point of view by HMRC.
Secondly, and related to the first point, is whether you own and let property as an individual or a company. Again, that will determine how you’re taxed on ongoing income and sale profits, and what expenditure you can offset against your tax bill. If you plan to leave property to your children or another beneficiary, you must also make sure they benefit financially in the way you intend and don’t end up with a huge tax bill.
The next thing to know is that – assuming you’re classed as an investor, which is the usual position for landlords - the rental income you earn as a landlord is not ‘standalone’ income. HMRC will put it together with your other earnings, such as your salary, so you need to be aware that any rental income you realise will be taxed on your personal code and could push you into a higher tax bracket or mean you lose current benefits, such as child support.
Then you have to recognise and appreciate how complicated property tax is, particularly when it comes to refurbishment, ongoing maintenance and any improvements that you make to a property. It’s important that whoever is dealing with your bookkeeping and accounts is familiar with Buy to Let and knows exactly what is considered a ‘capital improvement’, what items come under ‘repairs’ and which are ‘maintenance’. Using a recommended property tax specialist should ensure your profits from rental income are maximised and your tax liability minimised.
Finally, remember that no matter how well you plan, set up and run your property investment venture from the outset, so that it’s as tax-efficient as possible, things can change with every new budget – sometimes dramatically. For example, the impending reduction of Buy to Let mortgage interest relief will undoubtedly result in some landlords finding it difficult to make their current property investment model financially viable. And that’s got nothing to do with them planning badly; it’s simply because when they made their plans, the rules were different. So you must appreciate that tax rules can and do change periodically and try to invest in a way that gives you some flexibility if future budgets should bring more unwelcome tax changes.
As far as professional advice is concerned, if you haven’t already gone through your financial affairs with either a wealth manager or an independent financial advisor who is also a property tax specialist, it’s certainly something to seriously consider. They will be able to look at all your income and other investments and work with you to make sure you’re investing in property in a way that helps you meet your financial goals. You will have to pay for the best advice, but the right experts can save you many times over their fee on your tax bill.
Look out for next month’s update: Property Tax - Part two: Establishing your tax status with HMRC and understanding your liability.