Contents

• 1. Low Tax Environments
• 2. Maximising Reliefs and Allowances
• 3. Maximising claims for costs
• 4. Utilising Losses

1.0 Low Tax Environments

• 1.1 Pension Schemes
• 1.2 Limited Companies
• 1.3 Trusts

2.0 Maximising Reliefs and Allowances

• 2.1 Personal Allowance for CGT
• 2.2 The PPR relief
• 2.3 Rent a room scheme
• 2.4 Personal Allowances for Income Tax
• 2.5 Furnished Lettings

3.0 Maximising Claims for Costs

• 3.1 Maintenance and Capital Expenditure
• 3.2 Interest
• 3.3 Other Costs

4.0 Losses

• 4.1 Rental Losses
• 4.2 Other Losses

Low Tax Environments

1.1 Pension Schemes

Income and gains are tax free within a pension scheme. There are disadvantages with pension schemes however, in particular the limitations on what can actually be done with the wealth tied up in the scheme.

None the less a lot of commercial property is owned by entrepreneurs, through the vehicle of a self administered pension scheme.

It had looked like pension schemes would become major owners of residential property. However, the rules are complex and because FSA licenced pension fund managers have to be involved, administration is expensive, so as far as I know there has been very little movement of residential property into pension funds.

I would say watch this space.

1.2 Limited Companies

Many small businesses have been switched into limited companies over the last decade. Tax savings have been substantial. However this has mainly been about National Insurance, so as long as there is no National Insurance on Rental Income it will be quite unusual to hold residential property in a limited company.

From next year income tax basic rate will be 20% and Corporation tax lower rate will be 22%.

However, this is not entirely a forgone conclusion, for a higher rate taxpayer, trying to build up a property portfolio, reinvesting or paying down debt, a limited company might be quite an attractive vehicle. 22% corporation tax on both net rents and capital gains, is considerably better than the 40% such a taxpayer would suffer as an individual investor.

Whilst getting money out of a company would be additionally expensive for a higher rate taxpayer, stamp duty in particular might be considerably reduced by selling shares rather than properties when the time comes to sell up.

Only if you are already a higher rate taxpayer will investing in property through the medium of a limited company might well warrant consideration.

There is a rather nice scheme in section 4.5 of the booklet where a company can be used to leave a higher rate taxpayer and landlord, better off by reducing his 40% tax!

1.3 Trusts

Trusts are for protecting assets from wayward children, spouses, and in-laws. They are not usually effective for saving tax these days.

Maximising Reliefs and Allowances

2.1 Personal Allowance for CGT

Each individual has an exempt amount (currently £9600) over and above their income tax personal allowance.

Married couples should make sure they can use both allowances (lawyers can prepare a deed of variation, before you dispose of a property currently held in one name).

Landlords should bear in mind the advantages of spreading property sales (although stamp duty and solicitors fees mean that it will rarely be worth churning the portfolio just to save CGT).

2.2 The PPR Relief

Anyone who lives in more than one home over a period of time can nominate one of their homes as PPR.

This is useful for a landlord who say lives in Norfolk, but spends 10 weeks in Manchester doing up a property to let. Nominating the Manchester property ensures that at least 36 months of ownership will qualify for PPR, which can be a massive tax saving. This can be very useful if you are doing up the property for sale, but if you claim when the property is newly acquired, letting relief will effectively double the value of the PPR. (see section 2.4 of the booklet.)

Don’t forget to switch the nomination back to your main residence.

2.3 Rent a Room Scheme

The first £4,250 of income from a lodger is free of income tax (but no costs are allowed).

2.4 Personal Allowances for Income Tax

All small traders know that they can pay their wife and adult children or make them partners in the business to make best use of their personal allowances. So landlords should be looking at their own families to see if there are any personal allowances going unused…

2.5 Furnished Lettings

The first 10% of income from a furnished let is tax free, if the landlord opts for this instead of claiming replacements. Properties have to be ‘fully’ furnished to qualify. I like this relief – which is very useful for serviced lettings for example.

Maximising Claims for Costs.

3.1 Maintenance and Capital Expenditure

The Dangers

There are no allowances for capital expenditure until you sell the property.

Bringing a newly acquired property to a state where it is ready for letting - HMRC will tend to think this is capital.

Making improvements as you go along – HMRC will class the whole of the expenditure as an improvement and thus capital, even if the majority of it is necessary maintenance.

What to do about it

If at all possible delay maintenance until after the first letting.

Make sure you obtain a full list of furniture and fittings in the property when you acquire it, that way when you replace them that is revenue, rather than capital.

If at all possible don’t combine improvements and maintenance, do them at separate times, get separate quotes and separate invoices.

But keep iron discipline with regards to those improvement costs you will want to claim them to reduce 18% CGT when you come to sell the property. And pay your accountant a bit more to do proper accounts with a balance sheet, that way you and he will keep a hard record of capital and improvement costs.

3.2 Interest

Since 2005 Rental Accounts have been on the same footing as trading accounts for HMRC purposes, thus accountants think that interest on loans taken out to fund the business, even for withdrawal of capital, is tax allowable. HMRC think that only interest on loans for business purposes is allowable.

Certainly anyone who takes out loans which exceed the initial capital introduced (in simple terms if you revalue your portfolio and take out loans which exceed the cost of the property plus improvements), HMRC will seek to disallow the appropriate proportion of interest – probably the least of your worries if you are that highly geared!

But if you have personal loans, credit card debts for example, you may be able to take out a remortgage, withdraw the capital, pay off the private loans and get tax relief on the new interest.

3.3 Other Costs

Traditionally HMRC thought of rental income as investment income and didn’t allow costs such as travel and phone, however under the new accounting rules you should claim any reasonable costs, for mileage, phone, stationery, use of home as office, laundry, Eastern Landlords subscription etc…

Losses

4.1 Rental Losses

Losses from letting can never be used against other types of income, they are used automatically, firstly against income from letting in the same year, secondly carried forward against future profits from letting.

Not much we can do with this!

4.2 Other Losses

Losses from trading businesses can be offset against Rental income of the same tax year.

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