Being a landlord can be financially rewarding, but it also comes with its fair share of responsibilities. In this blog, I will share five essential tips that will save tax, that every landlord needs to know.
Whether you’re a seasoned veteran or just starting out in the rental property business, understanding and managing your taxes is crucial for success. Many landlords overlook important deductions or fail to keep accurate records, leaving money on the table come tax time. But fear not, because in this blog, I’m going to walk you through five essential tips that will help you navigate the complex world of rental property taxation and ensure you’re minimising your liabilities while maximising your returns.
So, what are these tax tips for landlords?
Just in case you didn’t know, we’re in the UK. So everything I’m going to tell you today is relevant to the UK tax system. Some bits might be relevant elsewhere in the world, and if they are, that’s not intentional, just coincidence. This also does not apply to a limited company, however some parts may be relevant.
Tax Tip 1: Understand your UK Landlord Tax Return filing requirements
Every landlord should be registered with HMRC. This is so HMRC know you have some sort of rental income. They will then issue a notice to file a self-assessment tax return each year that you have that income. They will also provide you with a 10 digit tax reference number known as a UTR (Unique Taxpayer Reference). The UTR is how they identify you and ensure that you pay tax on your rental income.
It doesn’t matter if you are making a profit or a loss on your rental, HMRC still want to know about it.
HMRC use information like the Land Registry and tenant deposit scheme to cross reference with their systems to see if there is anyone who has not told them about a rental property they own. They even check overseas, because if you are UK resident for tax purposes, you must report your worldwide income to HMRC. Any tax already paid in the UK or overseas gets included included in your UK calculation. You might not have a further liability to pay, but that doesn’t mean you don’t need to file a return.
Something we hear a lot is ‘I didn’t make a profit, so I didn’t think I needed to do anything’. And whilst potentially HMRC have not lost any tax in that situation, they could still issue penalties to you for not following your responsibilities. It may also have been to your detriment. If you were not making a profit, that suggests you might have been making a loss. You can carry forward allowable losses year after year and set them against any rental profits that you do make. However, you can only claim these losses against your profits if you have already told HMRC about the losses. If you didn’t file a landlord tax return, you can’t claim any losses for that year.
You might think filing a landlord tax return is a waste of your time and possibly money by getting a professional to do it, but it can actually save you money in the long term.
Tax Tip 2: Track all income and expenses related to the rental property throughout the year
You need to keep full records relating to your property rental business. This includes receipts for all expenses and income related to the rental property throughout the year. A great tip is to have a separate bank account that is only for your rental property or properties. This way it is much easier for you or your accountant to see what transactions relate to the property. Plus, if HMRC were to ever ask to see bank statements relating to the property, you don’t have to worry about them seeing personal transactions.
For those of you with multiple properties, don’t worry, all your properties incomes and expenditures can use the same bank account. You don’t need separate accounts for each property, unless this is something you want to do for your own records. You might use landlord specific accounting software or cloud accounting software to make your record keeping easier. We recommend Xero or Hammock.
By keeping track all year, it means you’re not going to miss or forget about some things that you could have claimed for. It also means you can keep a track of your estimated liability throughout the year. This way any liability on your landlord tax return will not be a complete shock and you will have had time to save up to pay it too.
Tax Tip 3: Take advantage of deductions that could reduce your taxes
The UK tax system is made up of some weird and wonderful rules. Some of those relate to property taxes, that you will need to know for your landlord tax return. You would have thought that every cost you incur, that is directly related to your property business, is allowed to be off-set against the rental income that that property generates, right? Wrong!
Just think about mortgage payments. If your mortgage is a repayment mortgage you can only claim for any interest you have paid. This is why the majority of buy-to-let landlords use the buy-to-let mortgage, which is generally always interest only. This is because for cash flow purposes, you’re not going to want some of your rental income paying something you can not claim for, as you might need it to pay that tax bill.
Examples of deductions that can reduce your tax are:
- mortgage interest,
- capital allowances,
- repairs and maintenance
- professional fees
Not every expense can be claimed against your rental income.
Some expenses can only be claimed against the sale proceeds when you sell the property. This is why you might hear the term ‘revenue or capital expenses’. Basically, anything that is replacing like for like in the property would usually qualify as revenue expenditure. Anything that is an improvement or an addition to the property would probably be classed as capital expenditure. Capital expenditure can only be utilised against any sale proceeds when the property is sold. Understanding this distinction can be really important.
Changes in the tax rules also occur.
So what was correct in one year might not be correct in the next year. Keeping on top of these changes is also really important. A prime example of this is changes around the tax relief on payments of mortgage interest. If you’re a higher rate tax payer, the amount of relief you can now get is lower than it was a few years ago. If you are a basic rate tax payer, there is no difference to the amount of relief you get, it’s just calculated in a different way.
Understanding these nuances within the existing system and keeping up to date on any changes can make sure you are claiming the most relief available to you, whilst keeping you within the law.
Tax Tip 4: Understand the capital gains implications when you sell a rental property
It’s not all about your taxable income each year though. Residential property sales now have their own tax rates, declaration form and payment deadline for Capital Gains Tax purposes. Some relief’s that were available to reduce capital gains tax a few years ago are less generous or no longer available. The period for deemed occupation has reduced too.
With interest rates going up significantly, some landlords are finding they’re kicking themselves for not reviewing rental charges every year with long term tenants or moving from that tracker or variable rate mortgage they have when they had the chance. Some are seriously considering selling some or all of their property portfolio. But what tax consequences would this create? How quickly can you find the answer and how much would it cost for you to find out?
Having a basic understanding of the Capital Gains Tax (CGT) implications of selling your properties can give you a massive advantage when you are considering sale.
- The particular circumstances of how you came to own each property,
- what you paid for it (or are deemed to have paid for it),
- if there are any capital costs that you have spent since acquisition (mentioned in tip 3),
- what the sale proceeds might be,
- if you have any periods of deemed occupation,
- if any reliefs would be claimable, are all important things to know.
Just as important are your annual earnings and if you have crystalised any other gains during the current year. Utilising all these can help you estimate a CGT liability for each property.
This will help you plan. Which one would be the best one to sell or which one wouldn’t be worth selling? If you combine this information with rental yields per property you can consider both income and capital aspects of a sale. It will also mean that when you have to pay your CGT liability to HMRC 60 days after exchange of contracts, the amount payable wont come as a complete shock. You will need to report the sale of a residential property on a 60 day CGT return and on you landlord tax return. This is to double check the amount already paid is correct.
Tax Tip 5: Choose the right software or accountant to help minimise your taxes
You might now be thinking ‘Yeah, it would be great if I could do all those things, but I have a real job and my buy-to-let is something I do on the side and I don’t have time to do all that’. Or ‘That sounds great, but I don’t know where to start’.
In our new found age of technology, as you might expect, there is a world of accountancy apps, cloud software, landlord and investment information out there. Some might be great for you or other might be overkill. Our advice is to get a professional on board to help you out. They will know the up to date rules and should have done the technology research for you as part of their job to their existing clients. It will save you time and money in the long run. They can do as much or as little as you would like them to do. If you want to do your own bookkeeping so you know what’s going on day to day, that’s great. But make sure your adviser has helped you get the software that’s right for you and that makes their job easier too.
Software can help you keep track of your income and expenses in real time. Meaning nothing will get forgotten or missed when it comes to your landlord tax return preparation. Any calculation of a CGT liability will be much quicker. The adviser will make sure your keeping on top of your responsibilities, following the rules and reducing your liability as much as possible (a good one anyway). So it’s win win.
Saving on taxes is a priority for every landlord in the UK, and these five tax tips can help you do just that. By taking advantage of allowable expenses, understanding the rules and keeping accurate records, you can maximise your savings and keep more money in your pocket. Remember, it’s important to consult with a professional tax advisor to ensure you’re taking full advantage of all available deductions and staying compliant with tax laws. Implementing these tips will not only save you money but also make your life as a landlord easier. So why wait? Start implementing these tax-saving strategies today and watch your profits grow.
For more information about your responsibilities when you are a landlord, follow this link, to HMRC.
To register with HMRC for your landlord tax return, follow this link.
For further information follow this link.
For more information about CGT, follow this link.