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No one likes property taxes but there are legitimate ways to reduce taxes and sometimes even avoid them altogether. At Landlord Vision we build property tax into everything we do because the software has to be able to help landlords manage their finances and fill in their tax returns. But we’re also experts as well…
Our sister sites, Property Tax Portal and Tax Insider, keep landlords, business owners and personal taxpayers constantly up to date. Our sister sites help people keep on top of changing tax laws, tax strategies and everything they need to know to reduce taxes. In this post we’re going to share with you our top tax tips for landlords. We’ll also show you where you can find more information on each tip so you can make them work for your personal circumstances. Are you ready to save some money? Let’s get started…
Claim All Your Tax-deductible Expenses
Sounds simple but you’d be surprised how many landlords (and just taxpayers in general) don’t do this! If you spend money on an item to make revenue and the item is solely for business purposes, you can deduct this from your income before you work out your tax liability. Of course, there is a bit more to it than that, but in a nutshell, you should be making the most of your expenses and recording each and every one.
Key tips here include making a note of your expenses as you incur them, whether that’s in a spreadsheet or a piece of software designed for this purpose. You should also keep receipts for your expenses where possible. You can store receipts electronically, which is a lot more efficient, but you can also store them physically if you need to. If you record your expenses throughout the year, when it comes to filling in your tax return, it should just be a case of totting up the numbers.
If you aren’t sure which of your expenses are tax deductible, or which are capital or revenue in nature etc., find out. There are plenty of free resources out there to help you learn more about tax-deductible expenses.
Here are some top tools to help with your expenses:
- Landlord Vision – Shameless plug here, but the software is designed to help you keep everything in one place. You can make note of your expenses as you go along, store receipts and there’s even a handy report that will make filling in your tax return easy!
- Free Income and Expenditure Spreadsheet – If you’re not up for using Landlord Vision this free spreadsheet is the next best thing. You can use it to keep track of your income and expenditure throughout the year and it will work out your profit and the amount of tax you need to pay. If you’re looking for a free and simple solution, this is it.
- Free Tax-Deductible Expenses Checklist – Another Landlord Vision resource, this free checklist guides you through the types of expenses that are tax deductible and also helps you understand the difference between revenue and capital expenses, betterments and repairs and other common expense related questions.
Nominate Your Main Residence – Take Advantage of Principle Private Residence Relief
Basic Capital Gains Tax Rules state that you are entitled to some tax relief if the property you are selling was once your main or only residence. So far so good. What a lot of landlords and property owners don’t realise is that you can change your main residence by nominating a new one and by doing this it is possible to reduce capital gains via this method on each property you buy. As capital gains bills are usually into the thousands knowing what you’re doing with main residence relief can save you a huge chunk of money.
As with much of the advice in this post they are tips of larger icebergs, so it may not be as simple as it sounds. There are of course plenty of rules around how and when you should nominate a main residence and how to leverage this rule to save the most amount of tax. It won’t work for everyone, but it’s something every property owner should check out. There isn’t a single article we can point to that will show you how to do this, but if you sign up for the free Property Tax Portal tax strategies course here, the third module explains how this works as a strategy. You’ll also learn lots of other useful tax strategies along the way.
Know Whether it’s Worth Incorporating
2020 saw record numbers of landlords incorporating and it’s sometimes hard not to jump on a crowded bandwagon as it rolls past. There are some good reasons why landlords incorporate:
- Incorporated landlords pay corporation tax on their profits at 19% at least for the next couple of years. It was announced in the 2021 budget that corporation tax will increase in a tapered fashion in 2023. Companies earning over £250,000 can expect to pay 25%, companies earning between £50,000 and £250,000 will pay more than 19% and companies earning less than £50,000 will stay on the 19% rate. On the other hand, personal taxpayers fall into thresholds of 20%, 40% and 45% depending on their earnings.
- If you are incorporated, you can pay yourself a smaller salary and top it up with a dividend payment from your company. This allows you to take advantage of the personal tax-free allowance and the dividend allowance – i.e. you can draw more money tax free from a company than you can as an individual.
- Finally, mortgage interest is still an allowable expense for incorporated landlords but has been phased out for individuals aside from a 20% tax credit.
- A limited company also limits your liability for events that require pay outs. For instance. If your property falls down and causes damage to a neighbour’s property and also causes bodily harm to tenants and passers by you will likely be sued. If you hold your properties within a company then the company is sued rather than you personally. If the company does not have enough money in it to cover damages, the people suing you can’t then pursue you personally for the shortfall. If you hold your properties personally instead of in a company, they can.
It sounds like you’d be daft not to do it, but it doesn’t make sound financial sense for everyone. If you’ve only got a small portfolio, if you aren’t planning on growing your portfolio or if your properties are shared ownership with people in lower tax bands it might be more hassle and expense than it’s worth to incorporate. The real tip here is knowing whether you should. Don’t just assume, actually do the reading, do the maths and see if you would be better off incorporating.
Do the Sums on Simplified Expenses When Working from Home
Similar to our previous point this one also comes down to moving away from assumptions. There is a lot of admin work associated with managing properties and most landlords do this from home. When you work from home and you are self employed you can claim the costs of running your home office as a tax-deductible expense.
Most self-employed people will use the government’s work from home expenses to deduct a standardised amount. This is because it requires no calculations and HMRC are far less likely to argue with you over your expenses if you’re using their own rates. There are other simplified expenses you can claim too and this Tax Insider article does a great job of breaking these down. For some people though it is worth doing the actual maths, especially if you have an office space in your home.
You can calculate portions of your bills and compare this with the flat rate. You only need to do this calculation once to see whether you’re better off sticking with the flat rate or whether you can write off more by breaking your work from home expenses down. There’s no good article that we can point you to on this, but if you sign up for the free Property Tax Portal tax strategies course here, the seventh module contains an easy step by step guide on how to calculate your expenses to compare them to the flat rate. The other tax tips you get along the way are just as juicy and helpful for landlords.
Submit Your Tax Return on Time
Seems simple right? But nearly 1million people missed the tax return deadline in 2020. More than 700,000 people waited until the day of the deadline to file and more than 26,000 people submitted in the very last hour before the deadline.
If you don’t complete your tax return and pay your liability on time, you will be fined and this is just money wasted. As well as the one-off fee for late filing you can be charged interest on late payments and the fees will compound if you continue to withhold your tax return. There are plenty of ways you can help yourself to file on time including:
- Using software to keep track of your income and expenditure throughout the year.
- Using a bookkeeper or accountant.
- Working out your tax liability every month and saving this amount in a savings account so you don’t have to find a lump sum at the end of the year.
- Taking notice of the many HMRC emails they send in the run up to the tax return deadline.
- Voluntarily signing up to Making Tax Digital so you submit 4 smaller returns throughout the year digitally via a software. This makes it a bit faster, but also means you pay your tax in 4 smaller chunks instead of 1 large one.
We hope you have found these tax tips and resources useful! Don’t forget to follow Landlord Vision, Tax Insider and Property Tax Portal on Twitter where we share all our new content.
