If one issue seems destined to leave buy to let investors in the dark, it's tax. In a recent survey 78% of landlords feel confused or uninformed about changes in buy-to-let legislation and tax, with capital gains tax and Council Tax among the greatest sources of concern.
There's still of need for help, advice, and information. The buy-to-let landscape never stays the same and new regulations affect professional landlords just as much as relative newcomers.
The first step in making your property tax efficient is knowing what expenses you can offset.
Capital expenses - those involved in buying and selling the property - don't count, but revenue costs, associated with the property's day to day running and management, are a different matter. Bear in mind, though, that while rental income is exempt from VAT, the costs you incur in running a property may well have VAT added.
The good news is that just about all expenditure is tax deductible and that includes letting and/or managing agents' fees, service charges and ground rent if the property is in a block of flats, buildings insurance if it's a freehold house, maintenance and repairs during the tenancy - for fair wear and tear, but not 'betterment'. You can also offset cleaning costs, accountancy charges and mortgage interest.
If you have cash, it might be tempting to pay for a property outright - but that way, you lost the tax relief you would get on mortgage interest. You also lost the leveraging power of your investment.
Instead, most landlords take out interest-only mortgages at a level where the repayments are roughly equal to the net income - usually a loan to value of 50% - 60%. This means a zero tax bill and makes the equity work harder.
There is also a little leeway on the maintenance and repairs allowance, which landlords may not know about. If a property is furnished, they can choose to either claim the actual amount spent on maintenance or take a notional deduction equivalent to 10% of the net rent to cover depreciation.
Clearly if a landlord spends more than 10% of their gross income on maintenance and repairs in a tax year, they will do it on an actual basis. But if they don't, they can claim the 10% allowance, even if they haven't spent anything on this.
Until 6 April 2015, landlords can also claim a special tax of up to £1,500 per property for insulation. Under this Landlord Energy Saving Allowance, you can claim for the costs of installing wall, floor, loft or hot water insulation in the let property. As long as the insulation is fitted to a finished property, not while it's under construction, you can claim this special allowance for the work completed before you let the property for the first time.
But you also need to know what taxes you have to pay.
Every landlord is subject to UK income tax, wherever they live in the world (though non-resident landlords may be exempt from paying capital gains tax). If the landlord lives outside of England or Wales, the agent - or the tenant, if there's no agent - is obliged to deduct income tax before the rent is paid. The landlord then submits a self-assessment tax return.
For those who haven't declared their taxable income or capital gain from the sale of property, HMRC's current tax amnesty gives them until 6 September to pay it.
When calculating your rental income and tax liability, check your rental income won't topple you over into a higher income tax bracket. If you earn more than £100k (not in this case!) it may be worth not renting out the property at all and just letting the capital grow (legal but possibly not a moral thing to do with so many people homeless!).
Also look into other ways of making you property more tax-efficient, such as taking advantage of the interest allowance. If the property has increased in value, you can take out additional loans on the increased value and claim interest, providing the amount is not greater than the purchase price.
If a spouse is in a lower tax bracket, you might want to put the property in joint names or in the lower taxpayer's name - but you must be comfortable with your spouse to give the whole asset away. Gifting property worth more than the tax-free threshold (£325k) may also be tax efficient - but you can't just hand over properties to offspring without financial implications.
Stamp Duty Land Tax (SDLT) is another minefield. On paper the bands are the same as when buying a primary residence. But SDLT legislation is a complete beast and it's never as simple as matching the purchase price with the band.
Ultimately, even if you own just one buy-to-let property, it's almost impossible to work out your buy-to-let tax situation on your own. What applies today may change tomorrow.
So the moral of the story: get out of the dark and seek professional advice.
From an article in the Telegraph Property pages, by Zoe Dare Hall.
Phil Spencer's tips for landlords
- Many landlords don't like letting to housing benefit tenants. But in the current state of play, with ten years there won't be any social housing in some places, to properties are needed for families on housing benefit.
- Avoid voids if possible, even if you let for a lower rate, for a short period, to get someone in quickly.
- There's an awful lot that can go wrong in the world but if you own the roof over your head, you can cope with almost anything.
And another thought ...
There isn't a specialist tax regime for buy-to-let investors, which means you might find yourself classes as a 'property investor', 'property developer' or 'property trader'. Which of these categories you fall into will depend on whether you bought the property to let out, built the property to let out, or just bought the place intending to sell it on but were persuaded by market conditions to let it.
It gets more complicated as any income or wealth secured from buy-to-let is not taxed separately. You can offset losses against income in some cases, but mostly you can't.
In short, managing tax when property is involved, and making the most of your returns, is a specialist area. Seek help from a wealth adviser or IFA who understands buy-to-let. They'll best be able to advise you on what to do to minimise your tax bill.