IF PAYING the July instalment of your tax bill proved more onerous than you had hoped, a review of your finances could be the answer. Every year UK taxpayers pay billions of pounds more tax than they need simply because they fail to take advantage of tax breaks and allowances. Buy-to-let investors have more opportunities than most to pay too much tax.
First, make sure that you are claiming all the tax relief that is due to you. You must pay income tax on your rents, but you can claim tax relief on mortgage interest payments, repairs, insurance, letting agency fees and on 10 per cent of your total annual rental income to cover depreciation and any fees paid to mortgage or other advisers.
If you are married, make sure that you are making use of both spouses’ tax allowances. This may necessitate a change in the way you own the property. In order for both of you to be able to use your capital gains tax exemption, of £8,800, you must own the property jointly.
If your spouse is in a lower income tax bracket than you are, or if they do not pay tax, you may wish to consider transferring a property into their name to take advantage of their personal allowance (which is £5,035 this tax year) and of lower tax rates to reduce your overall income tax liability.
For new investments, it may be worth looking for a property in a “disadvantaged area”, in which case there is no stamp duty to pay up to a value of £150,000. Stamp duty is usually payable at a rate of 1 per cent over £125,000, so you could save between £1,250 and £1,500 if you manage to find a property at the right price and in the right area. A postcode search tool on the HM Revenue & Customs website can help you to identify “disadvantaged areas”.
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Some investors choose to hold their buy-to-let properties within a company structure. There are significant tax advantages in setting up as a limited company. “In the majority of cases, a limited company provides a tax-efficient environment for a buy-to-let business,” says Jonathan Moore, marketing director of Mortgages for Business. “Companies do not pay tax on the first £10,000 of profit, and the small company rate is 19 per cent rather than the high rate of personal tax, which is 40 per cent.” The small company rate applies to profits up to £300,000. There are other advantages to a company structure. “Companies can also grow a portfolio quickly by continuing to reinvest the profits and thus deferring any tax,” Moore says. “Additionally, dividends can be extracted from a company in a tax-efficient way.” Companies can also define their own accounting periods, as long as these do not exceed 18 months.
However, there are drawbacks to setting up as a company. Although the lower rate of tax gives the investor an opportunity to build an investment portfolio more quickly, the cost of liquidating the portfolio will be greater. Moreover, the cost of drawing up accounts as a limited company is higher than if you are a sole trader. More importantly, mortgage lenders are less willing to offer loans to companies. “The majority of lenders will not actually lend to limited companies,” Moore says. “Funding is still achievable, however. Limited company buy-to-let mortgages can be competitive — we offer products such as a 4.99 per cent tracker for the length of the mortgage.”
There are a couple of other important points to note. One is that it may be worth paying an accountant to help out with your tax return if your affairs are complex. “The amount of tax you pay can be reduced if you understand and take advantage of the tax breaks available,” says Lee Grandin, managing director of Landlord Mortgages, a specialist broker. “We strongly suggest that all buy-to-let investors review their portfolios and speak to an expert about tax mitigation techniques. The cost of several hours of an expert’s time is considerably less than the tax bill you could receive if you fail to do so.”
Second, make sure that you fill in your return correctly, to the best of your knowledge. HM Revenue & Customs investigates up to 10,000 returns each year, so it is not worth risking any economy with the truth. He who dares does not always win.
www.hmrc.gov.uk/so/relief.htm
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