Tax, invariably, is a complicated matter, but some areas are more vexing than others, especially when it comes to property and even more especially when it comes to property rentals. Ensure you never fall foul of tax laws by avoiding these three easy-to-make buy-to-let tax mistakes.
1) Keep all paperwork
It’s a good habit to have home & letting ‘economics’ files (hard copy and digital) where you can keep all property-related documents and paperwork. Have a special file to keep track of all money issues – funds going in and coming out. It’s essential that you keep all receipts in chronological order, and with different subheadings, such as rent, maintenance, repairs and renovations, etc. This way you will always have the required receipts for tax purposes, and you’ll also have a clear idea of how much money goes where.
(Note that without a receipt, you can’t claim tax relief – see below.)
Make sure you keep a record of your bank statements too. A separate bank account for your property letting business is important, and keep whatever funds coming in or going out restricted to the account. And remember, a good filing system is a fundamental part of being a landlord.
2) Tax relief
The tax relief you claim must reflect ownership of the property; in other words, owning a property 50/50 but claiming tax relief for a lower tax earner at 90/10, is a definite no-no. If you co-own a property, you’re expected to choose whether you want to invest as ‘Tenants in Common’ or ‘Joint Tenants’. The best option for investors is ‘Tenants in Common’ because it allows you to put your share into a trust for beneficiaries. ‘Joint Tenants’ is best for couples who buy a home together which they will pass onto their family in the event of their death. The tax implications can be costly and very confusing if you get it wrong.
3) Costs and benefits
There are various ways to reduce taxes, but there is also no way to avoid paying tax altogether. If you’ve thought about setting up a company to hold property, make sure you fully understand the costs and benefits. Owning a property through a limited company will have advantages as well as disadvantages depending on your personal circumstances, how long you own the property, when you need to access the money and how it fits into your wider tax planning. Whether you own one or more rental properties, you have to prioritise your taxes, failure to do so will land you in hot water.
Rising property prices have generated good returns for property owners, most notably since 1996 when buy-to-let was first introduced. Buy-to-let can be a very good investment if prices maintain the upward curve, but it means you have to pay tax. Consulting with a property tax specialist should be high on your ‘to do’ list.