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:
- 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 This has been replaced by a flat tax credit of 20% of mortgage interest payments.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.
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.