Looming changes threaten to squeeze buy-to-let profits at a time when many landlords are still struggling with lost rental incomein the wake of the pandemic.
The sector narrowly avoided another stamp duty tax risein 2021, with theChancellorpulling an increase tothe investorsurcharge, to four percentage points, from the most recent Budget at the last minute.
It comes after the pandemic and successive lockdowns hammered tenants and hit landlords' rental income hard, creating a backlog ofpayments worth£360m, according to debt charity StepChange.
Many landlords have alsomissedout on valuable tax breaks that could prevent a large chunk of their income ending up in the hands of HM Revenue & Customs.
Reliefs on landlords’ income, such as being able to offset their mortgage costs against their tax bill, have gradually been withdrawn– and buy-to-let owners are now wondering whether the numbers still add up.
But there are a number of often underused reliefs still available which are now more important than ever.
How buy-to-let investors can reduce tax due on their income in 2022
Make use of little-known expenses
Many landlords are unaware they may be able to claim back for expenses such as the cost of travelling between their rental properties and phone callsor texts sent in connection with aproperty. Those with a monthly contract can expense only the proportion of time they use it for business purposes.
It is also possible to claim back the cost of subscriptions to property investment magazines,services and money spent on advertising the property, andlegal and accountancy fees connected to the buy-to-let. As you can see using the calculator below, deducting these kinds of expenses from your income can make a big difference.
Zena Hanks of Saffery Champness, an accountancy firm, said: “It may seem like a hassle to keep track of these small expenses but doing so will make HMRC much more likely to accept them. It’s important to remember that offset expenditure must be wholly and exclusively for the purpose of the business.”
Offset losses made during coronavirus
Buy-to-let owners had a difficult time of it throughout successive lockdowns, with tenants falling deep into arrears or demanding payment holidays. Landlords who make a loss in anytax year can carry these forward and offset them against their nexttax bill.
“If you made a loss of £1,000 this tax year and then turn a £20,000 profit next year you will pay tax on £19,000 instead,” Ms Hanks said.
The taxman will combine the income and expenditure from all of a landlord's rental properties in a year. This means that losses can only be carried over if the portfolio as a whole has made a loss.
Claim back for void periods
Others struggled to find any occupantsfor their properties during the coronavirus pandemic. Normally when a property is occupied, the tenant will cover the cost of council tax and heating.
Landlords who find themselves having to cover these bills during a void period may be able to claim the cost back on their self-assessment tax return.
Turn it into a holiday home
There are a number of tax benefits that come with running a property as a furnished holiday let rather than a long-term rental.
The former are treated as a business by the taxman and so you can still offset your mortgage interest against your tax bill. Those running a normal long-term rental can only claim back 20pc of their mortgage interest.
“If HMRC considers your holiday let to be a business, you may also benefit from paying capital gains tax at a rate of just 10pc when you sell it – whereas the maximum rate of CGT payable on a normal rental property is 28pc,” Ms Hanks said.
However if you have a portfolio of, for example, 10 properties and sell just one of them, HMRC is likely to question whether you really are disposing of a business and disqualify you from the relief. Landlords who own their properties via a limited company can also benefit from lower rates of CGT – whichis discussed in another installment of this series.
There are restrictions on what counts as a holiday let. Homes must be furnished, available to rent as holiday accommodation for at least 210 days a year and occupied by a tenant for at least 105. The property cannot be occupied by long-term tenants – those who stay for more than 31 days – for more than 155 days per year.
Costs and management fees can also be higher for short-term rentals and owners are more at risk of the property being empty for long periods.
Make the most of pension tax relief
Holiday lets do come with another key advantage, though. Profits from these can be treated as income for pension purposes, which means if you put this money into a retirement pot you can claim tax relief on it. With income from a normal buy-to-let, this is not the case.
Take on debt
“Although the relief is less generous than it used to be, you can offset up to 20pc of your mortgage interest against your tax bill. So it may be worth taking on some debt against the property to reduce your taxable profits,” Ms Hanks said.
However, buy-to-let owners would need to work through the numbers carefully here to make sure it made sense for them, she added.
This is part of a series about how landlords can save money on their tax bills. In this instalment, we find out how to pay less tax on your rental income. Read the others to find outhow to reduce your tax liability when holding a property and when selling up.
These guides are kept updated with the latest advice.
