Landlords: Cut your tax bill!

Many buy-to-let investors are missing out on the brilliant tax benefits available to them...

Landlords play an absolutely crucial role in the housing market.

With many potential homebuyers currently priced out of the market, it is down to the rental sector to take the strain, and with the State a little strapped for cash, that leaves private landlords doing much of the work.

There are a few benefits from becoming a professional landlord, not least the opportunity to make a bit of money from rental yields and growth in the value of your property portfolio, though these are somewhat undermined by the sheer amount of red-tape that you have to wade through.

However, there is an additional bonus that exists for buy-to-let landlords, which is being overlooked by many of them: tax breaks.

Time to get tax efficient

Paragon Mortgages, a specialist buy-to-let mortgage lender, has urged landlords to ensure they are making the most of the tax breaks available to them, many of which may have passed them by thus far.

To help them do so, the lender has put together a buy-to-let tax guide alongside accountant Perrys.

So let’s take a look at what tax benefits are available to buy-to-let landlords – and how to take advantage of them.

Company status

The way that the buy-to-let property is registered with the taxman can make a quite substantial difference to how much you end up handing over to the Government.

If you register your rental properties as being owned by a limited company, rather than by you as an individual, then its taxable status shifts accordingly. If you register the property as being owned by you as an individual then you will have to pay Income Tax on the money you make from the investment.

However, by using a limited company as the owner, your portfolio is then only subject to Corporation Tax, which is charged on three bands, depending on the profits of the company itself.

Profits of up to £300,000 face a tax rate of 21%, profits between £300,001 and £1.5 million will be taxed at 29.75%, while profits in excess of £1.5 million will be taxed at 28%.

So for higher tax-rate payers, who face income tax of 40%, registering your portfolio as a limited company looks far more attractive. However, do bear in mind that if you do go about things this way, and then choose to take the taxed profit out of the company, there will be an Income Tax charge of 25% on any dividends.

• Watch this video: Three top tips for wannabe landlords

Mortgage interest

It’s not just MPs that can benefit from assistance when it comes to paying the mortgage – buy-to-let landlords can too!

Related goal

Become a buy-to-let landlord

How to pick the right property, get the right mortgage, take out the right insurance, choose the right letting agent and most importantly, unravel all that red tape!

Do this goal

It’s not quite as simple as that though, as each case will be different. Here’s what you can be absolutely certain of though. All the interest that you owe on any borrowing taken out to fund your buy-to-let business, whether that be a mortgage or a personal loan (or even a current account overdraft) can be deducted from the income generated by the property before tax becomes payable.

In other words, the interest on your buy-to-let mortgage can be offset against the rents you receive.

As Paragon emphasises, this is one area that can get a bit complicated, and relies on you picking the exact right mortgage for your circumstances. I’d advise you to take advantage of the free – and just as importantly, whole-of-market and professional – advice on offer from the lovemoney.com mortgage team.

• Adopt this goal: Become a buy-to-let landlord

Capital Gains Tax

When the time comes to sell up, the money you receive for your portfolio will be subject to Capital Gains Tax, which is now charged at a flat rate of 18%.

However, you may be able to lessen this tax blow as there are quite a few loopholes or tax breaks available to buy-to-let landlords. For example, if the period was your main residence at any point during the time you owned it, you can claim a Private Residence Relief Lettings Exemption (a catchy name, I’m sure you’ll agree). What’s more, this exemption can be as much as £40,000, depending on other factors!

Get prepared!

There are plenty more areas to consider tax-wise for landlords, so I would really recommend downloading the full tax handbook from Paragon Mortgages (PDF).

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However, one thing that is absolutely clear is that before you even consider buying a buy-to-let property you have to have your plans for the investment pretty much in place – do you have an exit strategy, will you be registering the property in single or joint names, or even as a limited company, do you have a will in place?

What’s more, the answers to all of these questions may vary from case to case – there’s no standard answer.

From top to bottom you need to really know what you are doing before you get involved with buy-to-let, so make sure you get some decent advice from experts. All of the lovemoney.com mortgage team have years of experience advising on buy-to-let cases, so give them a try.

Alternatively, head over to Q&A and ask a question of other lovemoney.com readers. Many are buy-to-let landlords themselves so know the tax system inside-out!

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