A series of tax changes over recent years have taken their toll on residential landlords, with purchases of buy-to-let mortgages falling 22% from 2017 to 2018 according to UK Finance.
In April 2016, the government introduced a 3% stamp duty surcharge on purchases of additional homes, including buy-to-let.
Additionally, mortgage interest relief began to be tapered in April 2017, so landlords are only able to claim relief on 75% of their mortgage interest for the 2017/18 tax year, and 50% of it for 2018/19. This relief is set to be phased out altogether by 2020/21.
So in the light of these changes, what can you do to keep your property investments profitable?
One way to manage the effect of increased tax charges is to make sure you’re handling your costs as efficiently as possible.
Landlords can deduct the following costs for tax purposes:
- general maintenance and repairs to the property
- water rates, council tax, gas and electricity
- costs of services (eg gardeners and cleaners)
- letting agent fees and management fees
- legal fees for lets of a year or less, or for renewing a lease for less than 50 years
- accountant’s fees
- rents (if you’re sub-letting), ground rents and service charges
- direct costs, such as phone calls, stationery and advertising for new tenants
- the costs of running a vehicle for your rental business.
Investment rental or furnished holiday let?
With the rise of travel websites like Airbnb and increasing numbers of people holidaying in the UK, you might be wondering if renting for short-term holiday periods could be a better option.
Before you decide, it’s important to understand the differences between the two.
A furnished holiday let is generally used for short-term stays, so this tends to require more cleaning and maintenance.
It must be available for holiday letting for at least 210 days each tax year, and actually let for at least 105 of those days.
Buy-to-let properties tend to be for the longer term, so you’re not likely to have as much direct involvement with the tenant and the property while they’re living there.
One significant difference between these two methods of renting is the way they are taxed. While buy-to-let is considered an investment for tax purposes, a furnished holiday let is treated as a trade.
This means that with a furnished holiday let, you can claim certain capital gains tax (CGT) reliefs and capital allowances. Your profits also count as earnings for pension purposes.
On the other hand, letting holiday accommodation is standard-rated for VAT purposes, so you’ll need to register if your taxable turnover exceeds the VAT-registration threshold of £85,000 in 2018/19.
Any losses you make can’t be offset against other income and can only be carried forward to be offset against future profits.
Forming a limited company
The changes to mortgage interest relief may have prompted you to consider incorporating your rental business, as the restrictions to the relief do not apply to limited companies.
However, transferring your property to your company could incur significant CGT and stamp duty charges.
CGT on additional homes is currently charged at 18% for basic rate taxpayers, and 28% for higher rate taxpayers.
Make sure you’re fully clear on the tax implications of incorporating before you make the decision to do so.
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As with any investment, property comes with risk. Before investing in or selling property you should give careful consideration to the current market, and seek expert advice.