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Guide for Landlords : Navigating the Tax Maze

If you are considering becoming a Buy To Let landlord, here are some tips to navigate the maze surrounding tax in the private rental sector.

- Get expert advice: Seeking expert advice may cost some money in the short term but will save you considerably more overall as it will ensure you are aware of the pitfalls and you are armed with knowledge before undertaking a property purchase. Ultimately, whoever ‘owns’ / whose name the property is purchased in can have an impact on income and capital gains taxes.

- Keep accurate records: the HMRC initiative 'Making Tax Digital for Self Assessment' comes into effect from April 6 2024 (extended by one year). Landlords with gross rental income in excess of £10,000 will need to file a digital return every quarter. The right software and record-keeping will be a lifesaver when MTD becomes necessary.

- Maximise your expenses: Maximising expenses is essential for first-time landlords and you should make sure that you are keeping a record of all your expenses in letting the property and most importantly you know which expenses are deductible.

- Minimise tax: If you have a spouse, you could consider putting the property into joint names - this is a great way to maximise Capital Gains Tax exemptions on future sales and minimise income tax if you’re in a different tax bracket or personal allowances for one spouse are not being totally used.

- Form a limited company: First-time landlords could potentially look at setting up a limited company if you intend to acquire a property portfolio to hold your properties. Be aware of added costs for preparing accounts and company costs. Expenses will be deductible against the rental income including mortgage interest which is only given as a 20 per cent tax credit for individuals. The tax would be paid on withdrawing the profits but dividends benefit from a tax-free allowance and lower tax rates.

- Register for self-assessment: Registering for self-assessment is a must for new landlords. Ensure that you register with HMRC for self-assessment by October 5 following the end of the tax year in which you start to receive rental income.

- Managing agent: First-time landlords should consider using a managing Agent. Commission and management charges are all tax-deductible as well as accountancy fees for preparing your rental accounts and tax return. All tenant finding fees, gas/electricity checks and repairs are taken care of by Agents and this can be a more efficient and stress-free way to handle your property if you don’t want to deal with it yourself.

- Consider short-term lets: Letting a property as a holiday let has a different tax treatment (it’s treated as a business instead of an investment) and qualifies for business tax reliefs. Expenses are higher but tax-deductible and the rental income can be higher if you want to run the property more as a business.

- Plan your cash flow in advance: Planning ahead to avoid cash flow problems is a great habit to get into as a first-time landlord. It is important to get an idea of your potential tax liability and put a proportion of the rental money aside to pay your tax bill. Also, have some cash set aside for any essential repairs to your properties - storm damage and boiler breakdowns can happen at any time. In light of this ensure you are fully insured!

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