Landlords are always looking for an effective strategy to reduce their tax liabilities and increase their investment returns in the busy property market of the UK. Working with experienced letting agents based in Leeds can be a cornerstone strategy, providing you with nuanced, location-specific advice. However, there are additional, broadly applicable methods to reduce your property tax bill. Here are the top seven tips every landlord should consider.
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Fully Understand Your Allowable Expenses
The first and foremost step in reducing your property tax is to have a complete understanding of all your allowable expenses. The UK tax system permits landlords to deduct certain costs that are directly associated with the letting out of property, which can include but are not limited to:
- General Maintenance and Repairs: Costs incurred for the maintenance and property repair can be deducted, although improvements are excluded.
- Professional Fees: Professional fees include the fees for the solicitors, and accountants letting agents, who are instrumental in managing your properties.
- Property Insurance: Insurance premiums for buildings, contents, and public liability can be deducted.
- Utility Bills and Council Tax: If these are paid by you and not the tenant, they can be deductible expenses.
Maximising your claim on these expenses requires meticulous record-keeping and understanding of what qualifies as an allowable expense, a task that professional help can make significantly easier.
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Capital Gains Tax Relief
If you’re selling a property that is high in its value, you may be liable for Capital Gains Tax (CGT). However, there are some ways available to significantly reduce this tax burden:
- Private Residence Relief: If the property was once your main home, you might be eligible for relief for some of the period of ownership.
- Lettings Relief: This can apply if you’ve let out a property that was once your main residence.
- Consult an expert tax advisor who can help you navigate these reliefs and apply them wisely
3. Utilise Property Allowances
There are specific allowances for landlords offered by the UK tax system as follows
- The Property Allowance: This allows individuals to earn up to £1,000 in property income tax-free each tax year.
- The Replacement of Domestic Items Relief: This enables landlords to claim for the cost of replacing domestic items within their rental property.
Understanding and applying these allowances can provide significant tax savings.
4. Form a Limited Company
Creating a limited company offers tax advantages for landlords with multiple properties or high rental income, as personal tax rates can exceed corporation tax rates, enabling tax-efficient profit extraction through dividends. This structure not only allows for streamlined financial management but also offers the potential benefit of limiting personal liability about the business’s debts. However, it’s important to seek professional advice because this approach introduces its own set of challenges and costs, including the need for separate accounting and potential complexities in mortgage acquisition.
5. Claim for Wear and Tear
Before April 2016, landlords were able to claim a wear and tear allowance for furnished properties. While this specific allowance has been abolished, landlords can now claim for the actual cost of replacing furnishings in the property. This includes:
- Furniture
- Household appliances
- Kitchenware
- Retaining receipts and records of these expenses is essential for making a claim.
6. Relief in Mortgage Interest
Before calculating tax liability landlords can reduce their mortgage interest cost from their rental income. In recent years there changes made to this relief, replacing it with a tax credit that is worth 20% of your mortgage interest payments. Additional and higher taxpayers are affected by this shift change, but it is important to consider in managing your tax bill.
7. Explore SDLT Reliefs
When purchasing additional properties, landlords are subject to a 3% SDLT surcharge. However, some certain conditions and reliefs can reduce this burden:
- Multiple Dwelling Relief: If purchasing more than one property, you might be eligible for relief that can reduce the overall SDLT rate.
- Transferring Properties in a Divorce or Dissolution of a Civil Partnership: No SDLT is payable in these circumstances, under specific conditions.
Engaging with a property tax specialist can help identify if these or other reliefs apply to your situation, potentially saving thousands.
Conclusion
Minimising your property tax liability as a landlord in the UK requires a proactive approach, combining savvy financial practices with a deep understanding of the tax reliefs and allowances available. Leveraging the expertise of your specific locale, alongside solicitors and tax advisors, can provide invaluable guidance. Implementing these top tips will not only ensure compliance with UK tax laws but also optimise your property investments to achieve the best possible financial outcomes.
