What are the top tips on buy-to-let tax?
- Put your property in trust It can make sense to place your property into a discretionary or life-interest trust before you sell it in order to avoid Capital Gains Tax. At the moment, Her Majesty’s Revenue and Customs (HMRC) accepts this course of action. However, you should be aware that it costs thousands of pounds to convert to a trust. And if too many people do it HMRC may change its mind!
- Convert to a REIT Property investors with large portfolios might benefit from converting into a Real Estate Investment Trust (REIT) or selling it to an existing trust. REITs are not subject to corporation tax. However, this can be expensive as there is a 2% conversion charge, the REIT is required to list on a stock exchange, and it must comply with several onerous requirements.
- Married couples advice A married couple should put the property in the name of the partner with the lower tax band to reduce the income tax paid on rental income. Before you sell, add the other name to the property so you can both use your Capital Gains Tax personal allowances, currently £8,800 each.
- Most people should buy as an individual, not a company Analysts believe it’s only worthwhile buying as a company if you have at least 30 Buy-to-let tax properties. If you buy as an individual, you’re liable for income tax on rental income, which could be as much as 40% and you pay Capital Gains Tax at 18%. Conversely, small companies pay just 19% corporation tax on their rental income. However, when money is taken out of the business as a dividend, higher rate taxpayers incur a further tax charge of 25%. If the properties are sold and the company wound down, Capital Gains Tax is charged on the lot.
- Reduce your taxable income As a landlord, you can offset the cost of the following expenses against tax: letting agent fees; ground rent; service charges; council tax; buildings and contents insurance; the cost of replacing fixtures and fittings and 10% wear and tear per year; travel expenses to and from the property; legal and professional fees you might incur; accountant’s fees; interest on your buy-to-let mortgage; loan fees and the cost of debt collection. Keep records and invoices pertaining to these expenses, and your annual tax bill should come down.