Times are difficult for everyone at the moment and landlords are no exception. In fact, not only are landlords suffering the financial consequences of Coronavirus like everyone else, but this crisis has come on top of the final phase of the Government’s diabolical restrictions on interest relief for residential lettings.
To help beleaguered landlords, leading UK tax expert Carl Bayley of Taxcafe has put out a new 200 page guide, ‘Coronavirus Tax Planning’. The guide covers a wide range of subjects to help everyone protect their family and their business financially in these unprecedented times.
Landlords will learn that, despite the Government’s welcome deferral of the July 2020 payments on account under self-assessment, many will still face massive tax bills in January 2021. However, all is not lost, as the guide includes numerous tips on how to reduce or delay those bills through sensible planning measures, with many worked examples to show you how to do it and the savings available. There is plenty of action you can take, even after the end of the tax year on 5th April, to reduce those January 2021 tax bills by deferring taxable profits.
Many landlords may see a sharp fall in taxable profits this year, followed, we hope, by a return to normal levels next year. This makes the subject of ‘marginal rate planning’ especially important and the guide covers this in detail, taking the reader through its intricacies and explaining how to make the most of the opportunities available and the impact this will have on your cashflow, now and in the future. The theory is simple: you want more taxable income to fall into tax years with lower profits and thus a lower tax rate, and less to fall into a more highly taxed year; the guide includes a host of measures to help you put it into practice.
The guide shows how you can use ‘marginal rate planning’ to create absolute, permanent tax savings, including a critical analysis of the cashflow consequences – which are not always what you might expect. Sometimes to achieve a long-term saving, it even makes sense to accelerate taxable profits into a less profitable, low-income year. The guide looks at how this can be done, assesses the cashflow impact and analyses the benefit of this strategy as an ‘investment’.
In particular, for landlords, the guides look at voids and rent arrears, how these impact on your tax liabilities, and the tax planning measures that will provide the best, and earliest tax relief.
One major planning strategy is to either join, or leave, the ‘cash basis for landlords’. The cash basis changes income from being taxable when it arises (i.e. when rental income is due), to being taxable when it is received; it also changes expenses from being deductible as they are incurred, to being deductible when they are paid. But all this comes at a price, as there are additional restrictions on deductible expenses and loss relief. The guide looks at when it is worth paying that price to make bigger savings overall and how joining or leaving the cash basis can fit incredibly well with the ‘marginal rate tax planning’ that is going to be so important this year.
All this advice incorporates the changes to interest relief for residential lettings and explains how the change from a partial deduction last year (2019/20) to purely basic rate relief alone this year (2020/21) has to be factored in with all the other changes landlords are going through.
Depressed property values and depressed income levels are depressing, but it is said that ‘every dark cloud has a silver lining’ and the guide looks at how this could be a good time to undertake some of the long-term planning measures landlords may have been considering but which would normally be too costly to achieve. Lower property values mean transfers of property into your own company can be done at less ‘up front’ cost in Capital Gains Tax or Stamp Duty Land Tax (or equivalent in Scotland and Wales), leaving you to enjoy the long-term benefits.
Transfers of property to children or into trust may also be carried out at lower tax cost during the crisis: long-term Inheritance Tax planning strategies that can now be put in place with a reduced price tag.
And if, sadly, you are forced to dispose of properties at a loss, the guide looks at how to make sure you make the most of the available tax relief. Timing is critical!
Rental losses and excess interest (interest in excess of taxable rental profits before interest) are likely to arise in many cases this year and the guide looks at the tax relief available.
With furnished holiday lets likely to be particularly badly hit, a chapter is devoted to looking at the tax relief available for losses and also the question of maintaining the property’s special tax status during the Coronavirus crisis.
Lastly, if you’re stuck at home and the advice so far hasn’t given you enough to do, the forty-fifth and final chapter of ‘Coronavirus Tax Planning’ looks at how to earn some extra tax-free cash if you turn a hobby into a ‘cottage industry’.
(C) Carl Bayley 2020