For most people, tax is a non-negotiable part of life. However, if you’re a landlord or rental business owner, there are several ways you may be able to reduce the amount of tax you pay. If you’re willing to invest some extra time into your tax return and are happy to make some changes to the way you rent out your properties, you could reduce your yearly tax bill.
However, navigating tax laws can be difficult and making mistakes can result in penalties and fines. As a result, consulting an accountant is often the most-effective route to saving on taxes. But before taking that step, consider which of the following tax-saving measures you could make use of.
Submit an accurate tax return on time
Submitting your tax return on time might not reduce the percentage of tax you have to pay, but it will prevent you from paying hefty tax-related charges. Being late by even one day can incur a £100 fine and, if your tax return is late three consecutive times, this £100 may become £500.
Similarly, making mistakes on your tax return can also cost you dearly. If the penalty is deemed to have arisen as a result of a lack of reasonable care, you may need to pay a fine of up to 30% of the remaining tax you owe. Concealed or deliberate errors can incur much higher fines.
The best way to comply with all the rules and deadlines surrounding your self-assessment is to use making tax digital software for landlords. This will make it much easier to log invoices and expenses as well as accurately calculate your taxes. Currently, MTD software is only essential for landlords that are VAT registered, but in the coming years, MTD will start to impact all landlords who need to file their own tax returns.
Claim all your expenses
Claiming tax back on expenses is one of the easiest ways to reduce your bill at the end of the financial year. Expenses commonly include:
· Repairs, maintenance and decorating
· Legal and accountancy fees
· Insurance costs
· Utility bills (if provided by the landlord for the property in question)
· Advertising and letting agency fees
If your property is empty in between tenancies, you may also be able to apply for a reduction on some of the council tax payments you made during this time. In addition, landlords with a home office might also be able to claim back tax on £6/week without providing evidence of any costs.
Register as a limited company
Making the decision to run a rental property business instead of simply letting out properties you own can bring with it some tax advantages. Most personally-owned properties aren’t eligible for tax relief on mortgage interest payments, but properties owned by a limited company are. Instead of receiving a standard 20% reduction to cover mortgage interest payments, your limited company can deduct them as an expense. Your total profits will then be subject to corporation tax (19%) rather than income tax (20%), providing landlords with even more savings.
Transfer property to a spouse
If you own multiple properties, it’s easy for your rental income to move into higher tax bands. Any rental income you earn that’s above £50,000 but less than £150,000 will be charged at a higher rate of 40%. To keep paying 20% on your rental income, you could consider transferring one or more of your properties to a spouse. The benefit of transferring to a spouse over another family member is that you usually won’t have to pay capital gains tax on the transfer. However, it’s only worth doing this if the additional income won’t push your spouse into a higher tax band.
Renting a room in your home
Landlords who rent out a room in their own home can apply for Rent-a-Room relief. This means that you can earn up to £7,500 within a tax year from renting out a furnished room in your home without it being taxed.
However, if you share this income with a partner, another family member, or a flatmate, this amount will be reduced to £3,750. This is because the tax relief will be shared equally between each party. If three people are to benefit from the income from the room, then each party will still receive £3,750.
It’s also worth noting that your tax-free allowance does not increase if you rent out multiple rooms or run a bed and breakfast service.
Small business rate relief
Many landlords have to pay business rates on their properties if they’re used for non-domestic purposes or are set up as guest houses or holiday rentals. Small business rate relief is available to landlords who own a property with a rateable value that’s below £15,000. The relief means that you will pay lower business rates depending on the exact rateable value of the property in question. For example, a property with a rateable value of £12,000 would result in a 100% reduction in your bill, while one worth £14,000 would only reduce your business rates by 33%.
Relief on more than one property
Typically, small business rate relief is only for landlords who own a single property, but in some circumstances, you may be able to benefit from relief on two properties. If neither of your properties comes to a rateable value of £2,899 or the total rateable value of your properties combined is lower than £20,000, you could be eligible to continue receiving relief.
If you plan to claim small business rate relief, you should note that laws are changing from April 2023. To be eligible for the relief, your property will need to be let out for at least 70 days per financial year and must be available to let for at least 140 days.
If your property is empty for three months, you will likely be exempt from paying business rates. However, after this period, you will likely need to pay rates in full. There are only a few circumstances where you can claim relief for an unoccupied property, so it’s preferable to let your property out to balance out these charges.
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