There’s no getting away from it; the regulatory landscape for landlords has radically changed over the past few years. Alongside the Renters Reform bill there are also now tighter anti-money-laundering (AML) regulations across many industries, landlords included. Even licensing for HMOs (houses of multiple occupation) has been tightened up.
There are several knock-on financial effects for landlords.
- New regulations provide greater incentives for homebuyers, reducing the renting population
- Finance to expand can be harder to arrange
- Even welcome changes like the increased AML introduce additional costs in time and money
- Taxation changes can further reduce profits
The combined impact of these factors can be reduced by working with specialist property accountants like the ICS Accounting landlords team.
Identifying Tax Opportunities
The tax situation for landlords is notoriously confusing, so much so that HMRC published a document setting out example errors commonly made by landlords. This was last updated in 2017, so don’t treat those issues as current – but it’s not something they do for every industry, so that definitely tells you something!
We highly recommend that you double-check you fully understand your tax obligations not just when filling out your tax returns but throughout the year. With a clear understanding and careful planning, you can make the most of the tax opportunities you’re eligible for, and you may make decisions that reduce your overall tax liability, all while remaining fully compliant.
In particular, if you’re looking to sell some of your property portfolio this year, it’s well worth being aware of the potential Capital Gains Tax (CGT) implications of your sale, as well as any other charges that might apply. When divesting yourself of properties, a strategy can really help you to minimise effects.
Buy to Let Limited Companies
The 2020s has seen an explosion in the number of landlords incorporating as limited companies. This has one huge advantage in that it introduces a barrier against full financial liability. It can also mean lower tax liabilities at the end of the financial year, but this is by no means guaranteed.
As a limited company:
- You may be paying less corporation tax on profits than you would in personal income tax, especially at higher rates
- Restrictions on mortgage interest relief and relief on finance costs are more relaxed
But:
- There will be an additional layer of tax on what you pay yourself
- As property is considered an investment rather than a trade, you will be ineligible for some tax reliefs
- A number of buy-to-let mortgages are not available to limited companies, so you may find yourself having to take more expensive mortgages
- When you first incorporate, your property must be sold to the limited company, incurring capital gains tax, potential early repayment charges on an existing mortgage, and the costs of a new mortgage under the company
We’ve heard a number of people within the industry use a rule of thumb that it’s time to incorporate at about your tenth or eleventh property, but ultimately when and if you make the switch will depend on so many individual factors that this can only be a rule of thumb.
Whether you want to think about incorporation, aren’t sure if you could be more tax efficient, or just want to make sure you understand the finances of the business, get in touch – we’ll be happy to have a conversation.
