Take care of taxes to boost net profits
If ever there was a dirty word, ‘tax’ is it. Over the last few years, the government has hit buy-to-let landlords hard with various tax changes. However, there are ways in which you can minimise your tax liabilities – seeking the advice of an experienced accountant or financial advisor is a must for buy-to-let investors.
In this article, you’ll learn the five main tax issues that will affect buy-to-let landlords and property investors in 2019.
Tax relief on mortgage interest takes another step down
From April 2017, the amount of tax relief that a buy-to-let investor could claim on their mortgage payments started to reduce. Instead of deducting the payments from your rental income, you are given a 20% tax credit against them. This is being phased in until 2020/21 when the tax credit will be applied to the entire mortgage interest payment. This means that:
- 50% of the mortgage interest you pay during 2018/19 will be subject to the tax credit at the basic rate, and 50% will be allowed to be deducted from your rental income
- In 2019/20, only 25% of your mortgage interest payments will be deductible from your rental income, while 75% will be subject to the tax credit at a basic rate
If you pay tax at a higher rate, then this change will hit you. There are several ways in which you might reduce this liability, though. These include:
- Incorporating your properties as a limited company
- Ensuring that you are maximising your personal tax allowances by sharing the investment between you and your spouse
Everyone’s personal situation is unique, so you should always seek advice before taking any action with the objective of minimising tax liabilities.
Stamp Duty Land Tax (SDLT)
The government slapped on an extra 3% SDLT on additional properties in 2016. If you are investing in a buy-to-let property as a couple (or one of you does not own a property while the other does), you will be required to pay the full 3% additional SDLT. The same is true of partnerships.
Wear and tear allowance
It used to be that you could claim 10% of rental income against your rental profits as wear and tear allowance. The government changed this in 2016, as well. Now you can only claim what you have actually paid on replacements for wear and tear on furniture, furnishings, carpets, curtains, appliances, and so on.
However, one thing to be careful about is what you are replacing. The allowance can only be claimed on like-for-like replacements – meaning you should only claim replacement cost and not the cost of a brand new replacement.
Capital gains tax
If you are planning to sell any property in 2019, you should consider capital gains tax (CGT) liability before you do so. CGT on residential property is payable at 28% by higher rate taxpayers and 18% by basic rate and non-taxpayers.
There are ways in which you can reduce your CGT liability, which include:
- Ensuring that you claim all costs of improvement made against the sale proceeds
- Ensuring you maximise all CGT allowances – by selling after April 6th 2019 or by transferring part or all of your investment property to your spouse to use his or her allowances
A limited company would also pay a lower rate of tax, as proceeds would be counted as profits and subject to corporation tax and not a personal tax.
Again, if you are considering tax reduction measures before selling, please do seek the advice of a tax specialist. If you don’t, you could find your liability rises now or in the future.
Inheritance tax is a very specialised area. One good thing is that no CGT will be payable by beneficiaries who inherit property from a personal holder of investment property. However, there may be a liability for inheritance tax. There are various ways that might be used to reduce this liability, including:
- Structure of investment
- Various trusts
- Life insurance (although this doesn’t reduce IHT liability, it can be used to pay IHT)
You know what I’m going to say now – get specialist tax advice!
Put tax on your annual review list
It pays to review your tax position once a year when you review your property portfolio and investment objectives for the future. We cannot give you specific tax advice, so you should seek the help of tax specialists. They will discuss your unique situation and consider any taxes that may be affected by current or expected changes in your life.
One piece of advice we will give you with regards to planning for your tax is to use a tax specialist who has specific experience with property investment. You don’t want to be used as a test case by an inexperienced accountant or financial advisor.
If you aren’t sure of who to work with, we can provide contact details of excellent tax specialists and accountants. All you need to do is contact one of our team today at +44 0 1522 503 717.
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