Anyone with disposable income has a choice whether to spend that money on holidays and luxury goods or to save it. Arguably, there is a middle way: investing in property. The path of a landlord, if done right, can deliver a sustainable income well into your future, making it an attractive retirement plan.

However, far from being an easy way to guarantee income, investing in property is proving costly for many landlords. It seems, perhaps, that landlords have become an easy target in the eyes of the taxman as they have a physical tangible asset. 

Tax changes affecting landlords

Over the past few years, landlords have been hit with a series of tax changes that could seriously diminish their income. Here are the biggest recent changes that affect landlords:

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  • Purchasing property as an individual vs company – It now makes more sense to buy property via a limited company rather than as an individual due to the tax breaks afforded to companies.
  • No more wear and tear allowance ‒ Previously landlords could include reasonable wear-and-tear expenses in their tax allowances for fully furnished rental properties.  This could be anything up to 10% of your net annual rental income. Now landlords can only claim for costs arising from replacing items that HMRC deem to be domestic items that have been subject to wear and tear in their properties. It only applies when the item is unusable and genuinely needs replacing – not just repurposed for some other use. 
  • Additional 3% stamp duty on second homes ‒ Building a portfolio of properties just became more expensive as the government clamps down on second homes, introducing an additional 3% stamp duty on top of an already hefty fee.
  • Reduction of the full mortgage interest relief ‒ From April 2020, landlords can no longer reduce their tax bill by deducting mortgage expenses from rental income. This has been replaced by a flat tax credit of 20% of mortgage interest payments.
  • Potential rise of capital gains tax ‒ While it is unclear what will happen when, it’s expected that Capital Gains Tax will rise in the coming years to bring it into alignment with income tax rates.

And, as if this wasn’t enough, HMRC are introducing a new way of tracking, calculating and submitting tax returns for landlords, known as Making Tax Digital (MTD), potentially causing further pain for Landlords. 

As part of the MTD regulations, taxpayers will need to submit their annual tax return along with four quarterly submissions using recognised MTD software. If you outsource everything to an accountant, it’s inevitable that your costs will go up as you will need to submit five returns a year. 

Get started with a free MTD account from APARI.

How can landlords rise above all these changes and still come out on top?

Despite the situation looking pretty gloomy for landlords, not to mention the challenges brought about by the coronavirus, there is light at the end of the tunnel.

By preparing now for future tax changes, while rapidly adapting to the recent changes, landlords can develop a long-term financial plan that will help balance the books.

Here’s a few ideas of what can landlords do to help themselves:

  • Keep good/efficient digital records ‒ With the new MTD regulations, tax records need to be kept constantly up-to-date. While this can be difficult to achieve, it is even more difficult to pull all your records together five times a year for your accountant to process. However, tax software designed to meet the needs of MTD, such as the free version of APARI, is now available, so you can register and get used to the process well in advance. What’s more, APARI has been engaging with HMRC to provide landlords with software which is easy to use and reduces the cost of using an accountant.
  • Prepare for longer-term tax planning – Where an accountant may be able to add value is in your long-term tax planning. With all the changes to the tax system that have recently happened or are planned for the near future, ensuring that you don’t overpay is going to become difficult. Your accountant should be able to help you formulate a long-term tax plan to ensure that you never overpay.
  • Plan for capital gains, inheritance and income taxes ‒ Part of your long-term tax planning needs to consider potential changes to the tax rate for things like capital gains, income and inheritance. While the situation is still evolving in response to the coronavirus lockdown, you can get regular updates as part of the APARI community or through your accountant.
  • Expect the government to introduce the payment of quarterly bills ‒ The APARI tax experts expect, from their conversations with HMRC, that the result of the new MTD regulations will be that landlords are expected to pay their tax bills quarterly. By getting ahead of the new MTD regulations, you can avoid being stung for two tax bills in one year, ensuring you have enough saved for your quarterly bills, if introduced.

To help minimise future pain, landlords should start their long-term financial planning now. Part of this plan will need to involve keeping good, digital records using MTD-eligible tax software to minimise accountant fees. By starting with MTD software now, you’ll be well-practiced and prepared for the tax changes. You can then engage your accountant in more value-added advice and long-term planning to avoid becoming an easy target for the taxman.

Get started with a free MTD account from APARI.

1 COMMENT

  1. Many LL would be far better to sell off rental properties and own as many residential hones as they can.
    Ideally without a residential mortgage.

    Far better to have as many homes as one can achieve and then take in lodgers.

    Lodger income spread across multiple residential properties can still not exceed the total Tax free RFRA

    So 4 resi properties with 1 lodger each could still ve within the £7500 RFRA.

    The RFRA does not just pertain to 1 resi property.

    Of course such lodger occupants would need to be single unrelated occupants which means no family occupants at all.

    It makes no economic sense being a tenant LL.
    The most important bit being lodgers have NO protection from the Prevention of Eviction Act.

    This means lodger LL are in total control of their various homes.

    There is NO law which specifies a Lodger LL has to reside in their homes for any particular period.

    However a major imperative for lodger LL is that they would need to occupy their various homes at least once per month to satisfy resi insurance though it is unlikely that this would be necessary for any flat where block insurance is used.

    All depends on the block insurance conditions.

    The real problem with being a tenant LL is the inability to easily remove rent defaulting tenants.

    This severely impacts on viability.

    Any LL with tenants is just a big target for Govt to come and rob from.
    .Govt can’t do that so much with lodger LL.

    Personally I’m selling all ny rental properties.
    I will no longer be a tenant LL.

    But I certainly aspire to become a lodger LL though due to being poor I doubt I will ecer have the resources required to ve a lodger LL.

    If that means I’m out of the game then so ve it
    Being a tenant LL simply isn’t viable for most LL.

    With all the other attendant issues highlighted here on top of the eviction issue it really is game over especially for the 50% of the PRS that is mortgaged

    The other 50% of rich LL can absorb rent defaulting tenants and cope with the other issues.

    It really signals the death of the leveraged LL.

    Of course there are leveraged LL that are able and have the resources to cover for extended evictions taking possibly years
    Such LL are a very tiny minority.

    These Govt actions are really the death knell of the leveraged LL who would be far better off converting where possible to lodger LL.

    Easy to say of course!!!

    But to remain a leveraged LL is NOT for the fainthearted.
    There are far too many negatives to bother remaining a leveraged LL unless the LL can afford evictions lasting years across multiple properties.

    Only rich leveraged LL will be able to afford to do so.

    Inevitably there will be a massive shrinkage in the numbers of leveraged LL.

    The business model simply doesn’t stack anymore especially with the soon to be even mire dysfunctional eviction process.

    That is why I’m getting out of the game.
    The only reason I entered was because of the AST and S21

    Even with these BTL has been barely viable.
    Now to abolish them is game over.

    Govt will find it’s tax take from the PRS reduces considerably while at the same time massive increases in funding costs for TA will cost Councils billions.

    This is what happened in Ireland where there is today a massive shortage of LL and their rental properties as a result of very similar to the UK bonkers anti-LL policies.

    Personally I will be making 16 occupants homeless.
    A great shame I am being forced to.

    But Govt has made things unviable for me as I’m sure it has for many other LL.

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