Lee Sharpe looks at some potential tax saving tips for landlords to consider before the end of the tax year.
Set out below are some things to look out for in the run-up to the end of the tax year on 5 April.
Rates and bands
1. Watch those income levels
Most readers will be aware that pension contributions and gift aid donations will usually save tax. They do this by extending the basic rate band, effectively pushing up the higher rate threshold at which 40% income tax starts to be payable, instead of 20%. They have a similar effect on the additional rate threshold.
What is less well appreciated is their impact on the clawback of child benefit (at or around £50,000) or the effect of losing one’s tax-free personal allowance (at or around £100,000). Both of these can be extremely expensive and are dependent on one’s ‘adjusted income’ for the tax year, and in this context income is ‘adjusted’ (reduced) for pension and gift aid payments.
Example 1: Personal allowances and pension contributions
Bill has rental income of £102,000. He will lose £1,000 of tax-free personal allowance as it tapers off at 50% over £100,000.
A pension contribution of £800 in cash terms at any time in 2017/18 will put £1,000 into his pension pot and save him £400 in tax, as it will reverse the taper by £500.
2 Is it too late?
Pension contributions have to be made in-year, in order to work. Gift aid donations can be made retrospectively, so a 2018/19 donation can be carried back to 2017/18. The tax saving works the same way as for pension contributions, but of course the money itself goes to a charity.
Even then, in some cases, it can still save money overall.
Example 2: Retrospectively saving the savings ‘allowance’
In June 2018, Brenda gets her deposit account statements and realises that her total 2017/18 income, including £1,000 in savings, was just over the higher rate threshold of £45,000 at £45,100. Her new savings ‘allowance’ is restricted to just £500, basically because she is a higher rate taxpayer, so she has to pay £120 in tax on the last £500 of her savings income.
A gift aid donation of £80 made in 2018/19 and correctly carried back to 2017/18 can get her adjusted income back to just under the higher rate threshold, securing the extra £500 in savings ‘allowance’ and saving her £120 in tax – more than the donation itself. Pension contributions made in 2018/19 cannot be carried back to 2017/18.
Assessing the business
1 Claiming for expenses
It may seem obvious, but make sure that you claim for all of the ‘ancillary’ costs of running a rental property business, such as:
- use of landlord’s home as office;
- mobile telephone/landline;
- interest on any borrowings secured on non-business assets but used for the purposes of the property business;
- use of own tools and vehicle;
- use of own computers, laptops, tablets (see also capital allowances, below); and
- postage and stationery.
2 Timing of expense recognition
There is often a delay between realising that a large repair bill may be required, and actually paying for the work. So long as the cost of the repairs can be reliably estimated, and the contracted work has started by the end of the tax year, then it may be possible to accrue for the expense in the rental property business accounts, even though an invoice will not be received until the following tax year.
In essence, it depends on whether the landlord has a ‘legal or constructive obligation’ to pay for a quantifiable cost of repair work by the end of the tax year.
3 Capital allowances
While capital expenditure is not normally allowable against rental business profits, tax law recognises that some fixed assets are effectively consumed or ‘used up’ over several years’ use in a qualifying business. This includes items such as
- computers, laptops, tablets, smartphones;
- office equipment and furniture;
- tools and equipment used in maintenance and repair work, etc.; and
- potentially, even one’s motor car.
The rules around capital allowances can be complex, but generally speaking the kind of expenditure being contemplated by most buy-to-let landlords will be eligible for a 100% immediate tax write-off, in the year of acquisition. So, any time up to 5 April 2018 will be a good time to buy a new laptop (for example), while 6 April will be significantly less good (as it will be in the new tax year). Any business claim will have to be restricted where private use is not insignificant.
The capital allowances claims available to ‘specialist’ landlords such as houses in multiple occupation, hotels and commercial properties can be very substantial, and advice from a suitably qualified professional is strongly recommended – before acquisition (but here again, the same principle would apply; acquisition before the end of this tax year could bring forward tax relief by a whole year).
Family matters
1 Sharing income
Now’s the time to cast a beady eye over one’s nearest and dearest, to see if they’re pulling their weight; and, if they are, to make sure that they are being paid for doing so – at least up to the point that their tax-free personal allowance and 20% basic rate tax bands are being efficiently used. Paying a spouse or other adult friend or relative for working in the business can be an excellent way of ensuring that less net rental income is being taxed at the higher 40% or 45% rates.
HMRC is well aware of spouses being ‘used’ in this way and will look to challenge any remuneration that appears to be excessive, but so long as the amount paid does not exceed what would be paid to a third party for similar work, that should be acceptable.
Similar rules apply to the distribution of profits in joint investments between family members and fellow shareholders in a property investment company, but simply put:
- profit shares can be changed at any point in the tax year but cannot apply retrospectively, to profits already generated by that point;
- dividends are usually paid out in proportion to shareholdings and although waivers can be applied, specific advice is strongly recommended; and
- one should avoid payments to children who are not yet adults because they can still count as income of the parent, and there are non-tax rules about employing children that must be followed.
2 Capital gains tax
From a tax perspective, spouses and civil partners are an excellent device for reducing tax exposure by ensuring that assets are held in joint names so that more than one capital gains tax (CGT) annual exemption is available when a property is sold (it may also be possible to access lower rates of CGT, where annual exemptions are not sufficient to offset the capital gain).
It is also generally possible to transfer an asset, or a part interest in an asset, between spouses or civil partners without triggering CGT on the transfer itself. However, do bear in mind:
- HMRC can challenge transfers into joint ownership just before a sale;
- transfers may not be CGT-free if not living together as a couple; and
- there may be other tax implications for transferring assets to other parties – notably, stamp duty land tax (e.g. for a property in London) where there is a mortgage, and inheritance tax.
Elections and claims
A tax return can usually be amended within 12 months of its normal filing date – usually, 31 January following the deadline. But some claims follow a ‘four tax year’ rule – they must be made within four years of the end of the relevant tax year. A typical example would be finding out that you could claim for some of the interest on your home mortgage because you borrowed against your house to fund your business. Likewise, a capital loss must be claimed within four tax years of the year it arises, to be allowed against future capital gains (which could be many years later).
Just to be different, you get only two tax years to reinstate a child benefit claim if it turns out your income was lower than expected and you didn’t need to elect to cancel entitlement.
Practical Tip:
Most taxpayers with even moderately complex financial affairs will benefit from a housekeeping-type review. Unless your name is Brenda (as per the above example) this is much better undertaken before the end of the tax year!
