Shocked Chancellor orders landlord tax scrutiny

Shocked Chancellor orders landlord tax scrutiny

16:36 PM, 10th April 2012, About 10 years ago 24

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Shocked Chancellor George Osborne has ordered a closer scrutiny of buy to let tax reliefs after finding out that some of Britain’s richest landlords pay little or no income tax.

The Chancellor was shown redacted copies of tax returns with all personal data removed, and naively realised that instead of paying around a third of their income in tax, many were handing the tax man just 10% or less.

These were 20 of the highest earners in the UK – and their tax saving strategy was completely legal and led to ‘lost’ tax revenue of £145 million a year.

Osborne has promised to take further action to make the richer pay more.

The legal loopholes exploited by these high net worth individuals included standard landlord tax saving strategies of offsetting trading losses from previous tax years and charging business loan interest to their buy to let properties.

Both are standard property tax avoidance steps – and are completely legal.

For landlords who are not harnessing these strategies, here’s how to do it:

  • Setting off prior year losses – Any money spent on readying a buy to let property for letting that is not a capital cost can be included in the first year accounts. Refurbishing a letting property generally adds up to more than the first year’s rents and creates a trading loss.

    His loss can be carried forward to use against future profits. For example:

    A landlord spends £10,000 readying a home to let. In the first year he has rent of just £3,000 and other expenses, like letting agent costs, insurance, gas certificates etc of £2,000. The rental profit is £1,000.

    Deduct the profit from the £10,000 loss and carry forward the £9,000 balance to set off against the next rental profit, and so on until the whole amount is spent.

    Claiming loan interest – Many landlords do not realise they can claim any loan interest spent for their letting business against rents as well as buy to let mortgage interest.

    For example, a landlord spending £2,500 on a personal credit card on fitting a new bathroom as a direct replacement for an old bathroom can claim the interest against the letting business.

    Landlords can also refinance a buy to let business to repay any cash ‘lent’ to a letting business as a deposit to buy a rental property – and then set off the interest against rent.

    This borrowing could also a letting business overdraft repaying the landlord’s investment.

“I was shocked to see that some of the wealthiest people in the country have organised their tax affairs, and to be fair it’s within the tax laws, so that they were regularly paying virtually no income tax. And I don’t think that’s right,” said the Chancellor.

“The general principle is that people should pay income tax and that includes people with the highest incomes.”



Comments

by Mary Latham

9:34 AM, 11th April 2012, About 10 years ago

Mark there is a good reason why I don't know that rental losses can be carried forward ......... hahahahahaha

I would really like to hear what the author has to say about claiming set up costs.

I read this When work is carried out to an existing or newly acquired property which results in the asset being altered, improved or upgraded - that is makes it better than it had been before, then such costs are normally capital and should be disallowed in computing the rental profit or loss for tax purposes. This is here in this useful guide from HMRChttp://www.hmrc.gov.uk/agents/toolkits/property-rental.pdfIt goes on to complicate the statement made above and I cannot get my head around it but my accountant has always put set up costs against capital
When work is carried out to an existing or newly acquired property which results in the asset being altered, improved or upgraded - that is makes it better than it had been before, then such costs are normally capital and should be disallowed in computing the rental profit or loss for tax purposes.

This is here in this useful guide from HMRC

http://www.hmrc.gov.uk/agents/toolkits/property-rental.pdf

It goes on to complicate the statement made above and I cannot get my head around it but my accountant has always put set up costs against capital

by Mark Alexander

9:55 AM, 11th April 2012, About 10 years ago

ARTICLE AUTHORS REPLY - note that the author wishes to remain anonymous for personal reasons - clues to identity in previous post have been removed.
Section 57 Income Tax (Trading & Other Income) Act 2005Pre trading expensesAny money spent for the letting business goes in to the accounts on the first day of letting the first property as if it was spent on that day, providing:> The expense was incurred no more than seven years before the first letting date> The expense has not already been claimed against tax> The landlord would have been able to claim the expense if the letting business was trading when the expense was incurredSubsequent expenses are entered in to the accounts on the dates they were incurred.This section specifically relates to day-to-day spending (revenue costs) and not one off improvements (capital costs) - for instance repairing the roof is OK to claim, but adding a new loft room is not.

by

10:24 AM, 11th April 2012, About 10 years ago

The author's reply reflects my understanding of the tax law. Costs incurred  before or after acquiring a property are treated in the same way except that those incurred before the first year of trading should be included in the accounts for that first year. The same decision needs to be made for each cost as to whether it's a capital cost or maintenance. If I had to redecorate or replace a kitchen and/or bathroom when a tenant moved out that would be maintenance. So doing these before renting is equally just maintenance and therefore tax-deductable.

by

13:11 PM, 11th April 2012, About 10 years ago

That has been my understanding, on reading IR150 and it's web-successor "PIM" at http://www.hmrc.gov.uk/manuals/pimmanual/index.htm.

However, replacing a kitchen or bathroom before first letting a property, rather than cleaning and decorating, would suggest that the property was not fit for letting and therefore the expense is likely to be capital.
Similarly, replacing kitchen or bathroom between tenants is likely to be capital unless it was trashed by th eprevious tenant.  Even then it has to be a one-for-one replacement with items of similar quality; any additional items (eg changes to electrical outlets, additional cupboards, better quality items) introduces an element of improvement, and therefore a proportion is capital expense.

by Bob G

13:30 PM, 11th April 2012, About 10 years ago

Mary,  I am a sole trader. I own 36 properties in my name. In my first few years, I racked up about £70,000 in losses, these kept rolling up, and then when my property business became profitable, these previous losses were offset aginst my current profits.

by

16:53 PM, 11th April 2012, About 10 years ago

replacing kitchens and bathrooms is normally regarded as ongoing maintenance, unless they are  significantly better/ bigger than the old one. I have done this several times and always offset against rental income ( via my accountants ). I dont think that in the real world anyone would worry about adding an extra socket or changing the wall tiles. I have done this mostly before letting ( being more practical, usually ).

by Lee Gough

20:04 PM, 11th April 2012, About 10 years ago

 

A must read is ‘How to avoid property tax’ by TAX CAFE and
the author is Carl Bayley.  This book
will answer all your questions.

by Mark Alexander

21:00 PM, 11th April 2012, About 10 years ago

He Lee

Another good one is "Understanding and paying less property tax for dummies" by Steve Sims.

See http://www.amazon.co.uk/Understanding-Paying-Less-Property-Dummies/dp/0470758724

by Sharon Crossland

8:32 AM, 12th April 2012, About 10 years ago

Let's not forget the terms of the lease in all this!

by

10:20 AM, 13th April 2012, About 10 years ago

This is very boarder line, as if a “new” property is not a state it can be rented out, then getting into that state is a capital item.   But doing “repair” sooner rather than later is a revenue item.

The advice I got was that I could not put the new kitchen or carpets as revenue as there were getting the property into the correct state to be able to reasonability let it to anyone apart from a “no hoper”.  I think the answer comes done to your choose of accountant and has not been well tested by the legal process yet.


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