Tax Status of Buy to Let Profits

by Mark Alexander

22:21 PM, 2nd November 2012
About 8 years ago

Tax Status of Buy to Let Profits

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Tax Status of Buy to Let Profits

Tax Status of Buy to Let Profits

I have just received an email from a gentleman called Kevyn Davies-Jones about the tax status of buy to let profits and felt compelled to share it with you.

Feel free to join in with our rant. It’s unlikely to change things but you may feel better after doing so 🙂

Dear Mark,

Are my wife and I the only ones who get irritated with HMRC describing our buy to let profits as “unearned” income?

Apart from using agents to find tenants, we do all the management ourselves – we devise our investment strategy, we arrange repairs, we have disputes with tenants who have not paid the rent or caused damage, and we even do a lot of the painting and decorating ourselves.  Yet HMRC then class it all as unearned income.

I am not asking for new tax treatments (that is a separate matter), just a bit of recognition that actually, it can be hard work being a landlord!  

Yours sincerely,

 

Kevyn Davies-Jones

My response

I was with you all the way Kevyn, right up the the point of where you said “I’m not asking for new tax treatments”. Why not? It’s bloody hard work being a buy to let landlord at times and can certainly be incredibly stressful. Too right our profits should not be called “unearned” or taxed as unearned income!

Landlords profits are very much earned.

Now that you’ve got me on my soap box; why is it that seemingly any other business can roll-over their capital gains but for landlords it’s different?

Ahhh, I feel better for that.

It will be very interesting to read what others think about this.

Anybody else fancy a rent?

Please see the comment section below.



Comments

8:18 AM, 3rd November 2012
About 8 years ago

Thank you for your response Mark.

I agree with your point about rollover relief for CGT. However, i would also argue that there should be an averaging of CGT gains on properties over tax years. If you invest in shares, you can sell a proportion of your profitable shares each year and reinvest the provceeds in more shares. This way you ensure you get full advantage of the CGT annual exempt amount each year (the tax accountants call this bed and breakfasting). However, if you are a landlord, you cannot sell part of your property each year! Therefore when you do sell up, after, say, 20 years of ownership you only get one year's annual exempt amount.

My solution would be that the gain could be retrospectively spread over more than one tax year - ideally over the whole period of ownership. Therefore more than one annual exempt amount would be claimable. That way landlords would not be disadvanantaged over other types of investors.

There is a bit of a precedant for this as farmers can average their profits when they have good harvests and bad harvests alternately, but I won't hold my breath waiting for implementation. A change that makes landlords pay less tax is unlikely to be a big vote winner, even if it is fairer.

Kevyn

Maurice Kifford

19:50 PM, 4th November 2012
About 8 years ago

Whilst fully endorsing the comments made by both Kevyn and Mark I would like to suggest a couple of ways to redress the balance "in our favour" so to speak. Having been a landlord for many years, I have amassed a sizeable portfolio of rental properties, a large amount of which are held in mine and my wife's joint names. Recently my bank (HSBC) approached me to advise that as far as they were concerned I was running a business and that they intended to "force" me to open a business bank account into which all my rents were to be deposited. This of course would be very much in the banks favour as they could charge me business fees on virtually every transaction as opposed to nothing at all which is what they charge me now. All rents are deposited into my personal bank account.

Entering into what I thought was going to be a long hard battle that might well have resulted in me closing my account, I wrote to HSBC pointing out the following flaws in their argument;

1. HMRC did not treat me as running a business, they treat my rents as unearned income.
2. HMRC preclude me from paying into a pension fund as my income is derived from property and therefore "unearned"
3. Because the income is unearned, I am under no obligation to pay class 2 National Insurance.
4. If income is unearned, there is no profit. Therefore there are no class 4 National Insurance Contributions to pay either.

My local friendly accountant kindly assisted by producing the various extracts from Tolleys to support my argument after which HSBC have troubled me no further.

Like yourselves I too have to work hard at keeping my properties working efficiently but as far as I am concerned, if HMRC want to continue agreeing my tax returns on the basis that it is all unearned income then thats fine by me.

Hope my slightly alternative viewpoint is of benefit.

Maurice

1:32 AM, 5th November 2012
About 8 years ago

If I was you I would shut down my HSBC accounts; they are useless anyway and open up a Tesco savings accounts.
You can make Faster Payments to anyone you like but only by doing it online.
Anytime I need a cheque, I just credit the funds from my Tesco account to my bank acount via faster payment and job done.
My tenants pay into my savings account via SO.
Some give me cash which I can credit to m y Tesco savings account at a Tesco store anytime I like.
Get rid of these stupid banks, they don't know what they are doing.
They seem to think we need their silly expensive business current accounts.
There are now many ways to deal with your rental income than bother with a silly 'normal bank'.
I had a similar situation with Lloyds.
I dispensed with their services at NO loss to me.
The savings interest I earn on my rental money is far more than a normal bank.

mike wilson

17:45 PM, 5th November 2012
About 8 years ago

Interesting rant. I am not a tax inspector but I can guess the logic behind the HMRC position.

Once upon a time, before I managed my BLT portfolio, I used a solicitor/agent. (I am based in Scotland so estate agents are rare beasts). Now the solicitor charged me a percentage of my gross rents for this task. When I had more time on my hands I decided to dispense with the solicitors efforts. In any case I thought I could do it better. What i should have done was set up a company to 'manage the properties'. That business would have been a trade. The charges would be deductable against the gross rents. The profits of the management company would be taxed as any other trading business.

Of course when the solicitor was 'managing the properties', I was merely an investor.

The mistake is not separating the investment aspect from the day to day management of the business.

Just a guess ....

0:10 AM, 6th November 2012
About 8 years ago

Surely by not paying NI at 9% this unearned income status is purely in the landlords/investors favor ? I think there used to be a ' tapering ' relief which allowed for capital gains over the years. From a CGT perspective its probably best to hold properties in joint names so as to to take advantage of both CGT reliefs - perhaps you might even consider adding in spouses names prior to any sale to double the advantage again ?

Mark Alexander

1:12 AM, 6th November 2012
About 8 years ago

If you really must sell then I agree that a a transfer into joint names on the day of completion can be advantageous to mop up any unused CGT relief. However, do not sell until you've considered these alternative strategies >>> http://www.property118.com/index.php/exit-strategies-for-buytolet-landlords/

2:05 AM, 6th November 2012
About 8 years ago

Just for reference Maurice if you opt for HSBC's online business banking account facility with all (rents) monies coming to your account via standing order / direct debit and with all payments made by debit card, online payment or cheque, there are are no charges whatsoever for having a business account, no monthly subscriptions or anyhing, other than if you with drew cash using a cheque at the counter or other charges such as depositing cash! I have been using this account for 4 years now for my portfolio of properties and it works really well, and makes it a darne sight easier to separate personal and property expenses.

Regards

Sami

Puzzler

8:27 AM, 6th November 2012
About 8 years ago

Your expenses are tax deductible but your own time value is not. Therefore why not pay someone else to do the decorating? Find a good and reasonably priced agent and hand the management over to them. Firstly, you will know you are up-to-date with ever-changing legislation and secondly, it takes a load off you as well as being tax deductible.

13:01 PM, 8th November 2012
About 8 years ago

Some interesting points being raised - generally I cannot see many advantages for property rental profits being treated as earned income. National insurance would be due, as has already been raised and for me this would would be a significant additional tax burden.

If treated as earned income, HMRC will also seek to collect tax through your tax code i.e. any monthly salary. Whilst they have been known to try that even for 'unearned' income, you have got good reasons to stop that (because it is 'unearned' and therefore not predictable)

In relation to pension contributions, you can still make them upto £3,600 - this means you pay £2,880 into the pension pot and it will go in as £3,600.

Not sure I agree with the averaging and 'Bed & Breakfasting' points - averaging is a method used for working out the base cost of shares as you cannot tell one share in company A apart from the next one in the same company; you can with properties. Averaging also does not allow you to use your annual CGT exemption, it's a means of calculating the base cost only.

Bed & Breakfasting used to be the selling of shares on 5 April, bank a gain that is covered by annual exemption, buy the shares back on 6 April and have the higher base cost.

As far as I am aware you now have to have 30 days in between the transactions so running a considerable commercial risk of movements in the share price. Whilst I agree that the sale of individual shares is easier, it is a different asset class and much more liquid than property. (I guess you could always grant a property interest eg lease at a premium to a friendly party and stagger your gains that way - not sure there is a market for that but should work in theory).

I do however think that indexation should be available for individuals to remove inflation from taxation.

Regards

KJM

Recardo Knights

19:31 PM, 9th November 2012
About 8 years ago

Hi JKM

I did not know about the pension part, if I pay £2800 in to my pension pot, the govenment tops it up. Is the £2800 then deducted from my profits befor I pay tax on it, or is it still taxed?
What gets me as a builder is I cannot claim for my work or time. eg I needed to replace an old porch was quoted £2600.
Measured and ordered a poch for £1055.00 extra materials £60. I removed the old porch and fitted the new one. it took 2 days but i cannot bill the tax man for £300 labour. They must ASSUME it was delivered and FITTED ITSELF. i could have paid others £400-500 to fit it, but it's money going out not comming in.

Recardo


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