Presentation to Nottingham branch of the National Landlords Association, September 2013 - tax efficiency for landlords and property owners

1. Linda Frier FCCA
© Coalesco Certified Accountants 2013
The Tax-Efficient Landlord
Things You Need To Know

2. To be as tax efficient as possible a Landlord
should consider both Income Tax and Capital
Gains Tax.
This presentation looks at the two taxes –
covering income tax first…

3. Income Tax

4. If we consider a UK rental property (commercial or
residential) and not a holiday let then…..
• You pay tax on profits.
• Profit is rental income, less property expenses less wear and
tear allowance.
• You complete UK property supplement on self assessment
tax return (SATR).

5. • Tax is paid on profits as top slice of income – so if you are
employed and are a 40% or 50% tax payer already then the
profits from property will be taxed at 40% or 50%
• If you are a 20% tax payer then the additional income may
push into this bracket.
• Remember, there are no National Insurance Contributions to
pay.
So on paper you want your profits to be as low as possible
(or a loss) to ensure that you pay as little tax as possible.
How do you do that?

6. Claiming tax relief
on all your
property expenses

7. The higher the expenses we can deduct the lower the
profits and hence the lower the tax (if any) we pay.
HMRC tell us that if rents are less than £77k then we do not
have to analyse expenses into the boxes on the SATR but
just enter the total. My tip: always split the expenses into
the boxes reduce the possibility of questions from HMRC.
Generally you can claim the running costs of your business
as a deduction but you cannot claim as property expenses
capital costs.

8. Clients who have completed their own SATR often miss
deductible expenses:
• Rent, rates insurance, ground rents etc.
• Property repairs, maintenance and renewals.
• Loan interest and other financial costs.
• Legal, management and other professional fees.
• Costs of services provided, including wages.
• Other allowable property expenses.
• See http://www.coalesco.co.uk/accountancy-support-
for/landlords for a full checklist
Expenses should be incurred wholly and exclusively for the
property business.

9. Maintenance and
repairs – revenue
and capital

10. It is not always easy to determine whether a cost is capital
or revenue.
For example, if you build a new conservatory or add a new
bedroom this is clearly an improvement to the property
and capital in nature. This is because it has enhanced and
increased the value of the property.

11. Consider the replacement of windows. If you currently
have rotten single glazed windows then you may want to
replace them with UPVC double glazed windows. HMRC
now consider such expense as a repair rather than an
improvement even though the property has been improved
by replacing single with double glazing.
The cost of replacing windows is deductible against income.

12. You can save significant amounts of tax if big
cost items are categorised as revenue if you
have a profitable business.
Always think, can the cost be justified as
revenue?

13. Wear and tear
allowance

14. For a fully furnished property you can claim 10% wear and
tear allowance as a deduction against rental income.
Definition of “fully furnished”: to a level akin to a holiday
let. Part furnished properties do not attract this allowance.
Covers the cost of repair and replacement for soft
furnishings, white goods, televisions and other chattels.
You cannot claim the expense of renewing any items that
are covered under wear and tear.

15. You need to choose between claiming the renewal basis or
wear and tear.
It is usually better to claim wear & tear as you can realise
this allowance immediately. On the renewal basis you have
to wait to incur the repair or replacement expense. You
cannot claim the cost of the buying the item initially.
You can still claim the renewals basis for items not covered
under wear and tear – these will be integral fittings such as
the bathroom.

16. For example, if you spend £7.5k furnishing a brand new
property before you let it, then none of this cost can be
offset against your income until it is replaced which could
be 5-7 years in the future.
If you sell the property before you renew the furnishings,
then by using the renewal basis you will not be able to
offset any costs against your property. Using the 10% wear
and tear allowance you can claim this from the date you
purchased the property.

17. Alternatively, if you purchase a property that includes
fixtures and fittings, then again it will be beneficial to claim
the 10% wear and tear allowance.
The wear and tear allowance is equal to 10% of the net
rents after deducting charges that a tenant would usually
bear but which are, in fact, borne by the landlord (e.g.
council tax).

18. Rental losses

19. If you make a loss on your rental property you can roll the
loss forward to the next tax year; any future losses continue
to accrue until you start to make a profit.
During the tax year in which your property generates a
profit you will be able to offset losses from earlier years
against the profit.
You cannot offset losses against income from other sources
in our assumptions – you may be able to offset losses from
a UK or EEA holiday let.

20. In order to take advantage of accrued losses you
must notify HMRC of such losses.
Make sure you include all expenses on SATR in
the early years to take advantage and reduce
your tax liabilities going forward.

21. Remember to keep
your paperwork

22. Retain all complete information relating to the
property business for 7 years.
Keep anything relating to the purchase or
improvement to a property until disposal.
On our website is a listing of items we
recommend you retain.

23. Married couples
and rental property

24. If you and your spouse hold a property jointly the income
and expenses will be split 50:50 even if the property is held
in unequal proportions.
You can elect to have the income taxed in the same
proportion as the percentage of legal ownership of the
property.
You do this by making an election to HMRC to disclose the
income on the same basis as the share of legal ownership.

25. Should the property be held in equal shares it is still
possible to make an election to apportion the income in
unequal shares for tax planning purposes.
A profitable property business where, say, the husband is a
40% tax payer and the spouse is a 20% tax payer or even
has unused personal allowance can take advantage of such
an election.

26. To do this you must have a solicitor draw up a declaration
of trust which states the “beneficial ownership” of the
property between spouses.
Once the split is agreed, the declaration of trust states who
is entitled to what, the original document must be sent to
HMRC along with the election form.
The new income split will only take effect from the date
HMRC agree the split.

27. Financing a
property

28. Remember you get tax relief on any interest you
pay on borrowings under a rental property,
where as there is no mortgage relief available
for your own home.
Think about how you organise your borrowings
to maximise tax relief.

29. How should you
hold a rental
property?

30. There are different structures that you can use including:
• Sole trader
• Limited company
• Partnership
• Limited liability partnership
You should consider both the tax and non-tax implications…

31. For example, if you do not need the money from your
rental properties and you are the sole owner, you will be
still taxed on profits even if the monies sit in a bank
account untouched, say at 40%.
However, if you incorporated a limited company you would
not be taxed personally on the profits and the company
would pay corporation tax at just 20% so savings can be
made.

32. I have a portfolio that is owned for long term holding of
residential property, is let to produce an income but not
drawing money. I do not use limited companies because:
• There are far fewer mortgage providers willing to provide buy to
let mortgages. Rates and fees tend to be much higher.
• Personal CGT allowances are significant if you sell a property.
These are not available to companies.
• CGT can be much lower than corporation tax.
• I may choose to live in a property and I can claim reliefs for this.
• Personal withdrawals from a company (over and above the
amount I invest) would be taxable as earned income or dividends.

33. Capital Gains Tax

34. HMRC are systematically using the Land Registry to ensure
that they collect all the CGT due to them.
Despite the potential expense, many landlords fail to
consider CGT planning when purchasing buy to let property.
The CGT payable on disposal can reduce massively the
returns available.
The CGT system was replaced in 2008 whereby regardless of
how long the landlord had owned the property CGT was
charged at 18% or 28% depending on other income earned.

35. Landlords need to play the game of tax avoidance and plan
to avoid tax bills. Remember the chargeable gain is:
Sales proceeds,
less sales costs (being estate agents and legal fees),
less acquisition cost,
less costs of acquisition (legal fees),
less capital improvements (say an extension).
Each individual has a personal exemption each fiscal year
that they can use to reduce capital gains (2013/14: £10,900)
but remember this could be needed for share disposals, etc.

36. Principal Private
Residence relief
(PPR)

37. This rule allows any landlord that has lived in their rental
property as their main home at some time to significantly
reduce their CGT liability.
There is no specific time laid out in tax legislation. Tax case
law has emphasised the quality of occupation rather than
the duration. The onus is put onto the landlord to prove
that they really “lived” in the house and not occupied it as a
tax dodge.

38. Details which a landlord can use to reinforce their case are:
• Demonstration that you have actually moved in and furnished
the property, e.g. a receipt from a removal firm.
• Copies of your official post so bank statements, utility bills and
driving licence showing as registered at your home address.
• The details for you on the electoral register at the home
address.
• Your family (unless separated) are also at the home address.

39. Having established that the property was your PPR at some
point in the past there are a number of reductions that this
status can provide.
Where a landlord has lived in a buy to let property as their
PPR the period of occupation, along with the 3 years of gains
prior to disposal, is exempt from the CGT tax liability, even
where they have not lived in the property for many years.
The period that you lived in the property as your PPR is also
exempt from any capital gains.

40. Letting relief

41. The other big relief for landlords who have lived in one of
their rental properties as their main home is letting relief.
This allows a landlord up to a maximum of £40k capital gain
for letting their property.
The relief is available for each person with an interest in the
a buy to let property so, if it is jointly owned, each of the
owners would potentially benefit from a £40k reduction in
their CGT liability.

42. Get married

43. Get married and own the buy-to-let property
jointly – we have already seen the advantages
around personal tax.
The following example shows how we can use
the PPR relief and annual personal allowance for
each person.

44. A and B bought a property to let in June 2002 and sold it in
June 2012. They each own a 50% stake.
The taxable gain with no occupation is as follows:
Sales proceeds 375,000
Cost of disposal 5,000
Improvement costs 20,000
Purchase price 145,000
Cost of acquisition 5,000
Chargeable gain 200,000

45. Neither A nor B have lived in the property.
A pays tax at 40% (salary £50k) and B pays tax at 20% (salary
£20k).
Each have a chargeable gain of £100k; after deducting their
annual allowance of £10,600 (2012/13 allowance) each have
a taxable gain of £89,400.
CGT paid by A is £25,302.00 and by B is £22,784.50. In total,
£48,086.50.

46. Taking the same couple but this time assuming they had
lived in the property for one year in 2005:
Chargeable gain 200,000
50% split 100,000
Less PPR 40,000
Less letting relief 40,000
Chargeable gain after relief 20,000
Less Annual Exemption 10,600
Taxable gain 9,400
Total tax payable 4,324
4 out of 10 years qualify for PPR exemption
A charged at 28% and B charged at 18%
One year of occupation saves nearly £44k in CGT.

47. • www.coalesco.co.uk
• linda.frier@coalesco.co.uk
• 0115 928 3228
• @CoalescoNottm