Tax saving strategies are ways for landlords to minimise tax on rental income, optimise cash flow, and increase long-term profitability.
There are numerous factors to becoming a successful buy-to-let landlord. One that often gets overlooked is tax efficiency. Simply put, tax efficiency strategies are ways for landlords to avoid tax on rental income, optimise cash flow and increase long-term profitability.
Whilst they are not the most glamorous part of being a landlord, the tax-saving strategies outlined in this article can make a huge difference to your bottom line, and even mean the difference between success and failure as a property investor.
The very first tip for landlords and investors is to make sure you have systems and tools in place to accurately track all of your allowable expenses. These should normally include:
This is one of the most effective ways to reduce your end-of-year tax bill and increase profits.
There are plenty of landlords who could reduce their tax bills simply by being a little more diligent about their expenses, so our advice is to make sure you claim for everything.
Keep every receipt and speak to your tax advisor or accountant about exactly what you can and cannot claim for… you may be surprised by how quickly your expenses mount up!
Landlord Studio can help you keep track of income and expenses and receipts. Find out how…
Over recent years, there has been a push by many investors to set themselves up as limited companies. This can be a great way to reduce your tax bill. By investing through a limited company you will have certain benefits including paying corporation tax rather than income tax, tax-free dividends, and additional tax relief.
However, it comes with a variety of additional costs, paperwork, responsibilities, and caveats and is not suitable for everyone’s situation. As always, we suggest talking with your accountant to find out if you could benefit from this tax saving strategy.
If you or your spouse are in a lower tax bracket then it might make more sense to have the assets in their name. Generally, Capital Gains Tax isn’t paid when assets are transferred between spouses, so this could allow you to take advantage of a lower tax bracket and save a substantial amount at tax time. If the property in question doesn’t have a mortgage associated with it and you are not taking any financial gain from the transfer, you won’t have to pay any stamp duty either.
One expense a lot of landlords often forget about is their home office allowance. Even if you only own a single rental property you are entitled to a business expense associated with the running of a home office. This is a minimum of £4 per week or £208 per year without having to provide written evidence of their expense deductions. Again, to make the most of this expense, talk to your accountant.
Rental losses can be carried forward and offset against rental profits in subsequent tax years. This means if you make significant losses in any one year – for example, you are required to undertake expensive maintenance works – then when you do begin making profits you can still deduct these losses even if you couldn’t or didn’t in the year they happened.
From April 2016, the wear and tear allowance was replaced with the Replacement Domestic Items Relief (RDIR). This allows you to deduct the cost of the replacement of furniture or appliances with a like replacement. Additionally, landlords can claim any costs associated with the disposal of the old item.
This relief cannot be used for upgrading furnishings or purchasing new furniture. It can only apply when an item is genuinely replaced and no longer used in the property.
For example, should an appliance break during the tenancy, such as the washing machine, then you can deduct the cost of a like replacement as well as the cost of disposing of the old one.
For landlords that are facing a large capital gains tax (CGT) bill when they sell their buy-to-let property, there is the possibility to convert it to a primary dwelling and take advantage of letting relief.
You can read the government’s guidelines on Private Residence Relief and Letting Relief here.
To do this you will need to live in the property as your main residence. In this scenario, you would qualify for letting relief for the period of time you occupied the property.
For example, if you owned the property for 10 years, let it out for 6, but lived in it for 4, you would pay CGT on 60% of the gains, reducing the CGT bill by 40%.
Having your property regularly reassessed and getting an updated value on it can help strengthen your hand when it comes to talking to lenders. With exact data on how much equity you hold, as well as an accurate picture of your portfolio performance, you may be able to get lenders to reevaluate your loans, potentially reduce your interest rates and even qualify for additional loans to increase your portfolio size.
As part of this, it’s essential to have accurate and detailed records of all of your income and expenses throughout the year. Using the Landlord Studio software, you can easily digitise receipts at the point of sale, record income and expenses in real-time using our bank feeds feature and intuitive mobile app, and instantly generate and share any of over 15 professional reports for advanced data insights into your finances.
The best way to save on your taxes as a landlord is to employ excellent property management and accounting software and to use a quality accountant and reliable tax advisor. With the right tools and knowledgeable advisors to assist you, you’ll be well on the way to minimising your overheads and maximising profits.
We hope you found this blog interesting! However, do note that the information in this article does not constitute advice. This blog is for general informational and educational purposes only and should not be used as a substitute for competent legal and/or other advice from a licensed professional.