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Putting together an efficient tax strategy should be a no-brainer for buy-to-let landlords seeking to maximise their income.

It may not be quite as glamorous as hunting down the perfect property, but when it comes to saving cash, it can make a huge difference to your bottom line.

There are several ways you can reduce your tax bill, so you could:

Set up a limited company: This can be a great way to reduce your tax bill as a landlord in some circumstances. Not only will you be able to buy a property through the company, which will allow you to offset costs against profits, but you will also be able to employ yourself or someone else to manage the properties held within your portfolio.

On top of this, limited companies continue to be exempt from the rules change to Mortgage Interest Relief, meaning that they can continue to reduce their tax bill.

Extend to reduce: Putting money into your existing properties will help you avoid hefty stamp duty charges and should see the value of your portfolio rise at the same time.

Use all available tax bands: Another way to potentially cut your tax bill as a landlord is to transfer your assets to your spouse. Capital Gains Tax is generally not paid when assets are transferred between spouses, so you could effectively make use of their lower tax bands.

There is also the possibility that you will be able to pay less tax on your rental income too if their tax bracket is lower than yours. If the property in question doesn’t have a mortgage associated with it and you are not taking any financial gain from the transfer, you will not have to pay any stamp duty either.

Get the most from your property: Having a more accurate assessment of how much your rental property is worth will strengthen your hand against lenders and get them to re-evaluate your loan to value.

Should your rental property price increase, your loan to value will go down and that could mean more choice and a better mortgage interest rate for your buy-to-let business.

Claim your legitimate expenses: Claim everything you are entitled to if you want to become a tax-efficient landlord.

Keep every receipt and speak to your tax advisor or accountant about exactly what you can and cannot claim for – you will likely be surprised by how quickly these landlord expenses mount up.

Consider short-term lets: If you are in-between tenants, there are ways in which you can lower your tax bill.

Sometimes it can be worth considering the option of taking on a short-term let during a void period to get some money coming in.

Choose the right time to sell: Too often, landlords lose money when they sell a rental property simply because they do not take full advantage of the available tax relief on offer to them.

This is especially true of landlords with multiple properties, as they can reap the benefits of the zero per cent Capital Gains Tax band every year should they decide to sell one of their homes. Currently, the tax-free figure stands at £12,300.

Link: Working out your rental income: https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income

The second part of a sweeping review of Capital Gains Tax (CGT) has been published with 14 key recommendations.

In July 2020, the Chancellor asked the Office of Tax Simplification (OTS) to carry out a review, to “identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent”.

Given the wide scope of the review, the OTS has produced two reports. The first report ‘Simplifying by Design’ was published in November 2020 and considered the policy design and principles underpinning the tax.

This second report covers a wide range of areas – from moving home to getting divorced, running or investing in a business and issues affecting land transactions.

It also highlights a broader concern about the low level of public awareness of the tax and the extent to which the administrative systems could do much more to support taxpayers.

The report makes 14 recommendations, including in the following areas.

Integrating Capital Gains Tax into the Single Customer Account

There are three main ways of reporting a capital gain – through Self-Assessment, the UK Property tax return for disposals of UK residential property and the ‘real time’ Capital Gains Tax service.

The OTS recommends that HM Revenue & Customs (HMRC) integrate these into the new Single Customer Account, making it a central hub for Capital Gains Tax data, to ease the administrative burden for the 500,000 or so people who file returns of disposals in a typical year.

UK Property tax return

Around 150,000 individuals make a disposal of UK residential property each year, 85,000 of whom have a taxable gain and need to file a UK Property tax return within 30 days.

Even with adequate awareness and preparation, the OTS considers that 30 days is a challenging deadline, even if this return were integrated into the Single Customer Account.

The OTS recommends that the Government consider extending the reporting and payment deadline for the UK Property tax return to 60 days, or mandate estate agents or conveyancers to distribute HMRC provided information to clients about these requirements.

Private Residence Relief nominations

Private Residence Relief takes main homes outside the scope of Capital Gains Tax. Where taxpayers have more than one eligible home, they can choose which home they wish to benefit from the relief by making a nomination to HMRC.

At present, there is insufficient awareness of the nomination procedure among the 1.4 million people who own second homes. It is also peculiar that nominations are needed even where no capital gain can arise on a rented second home.

The OTS recommends that the Government review the practical operation of Private Residence Relief nominations, raise awareness of how the rules operate, and in time enable nominations to be captured through the Single Customer Account.

Divorce and Separation

Married couples or civil partners can transfer assets between them without triggering an immediate Capital Gains Tax charge.

Divorcing or separating couples continue to benefit from this rule in the tax year in which they separate.

However, after that, transfers take place at market value in accordance with the normal Capital Gains Tax rules.

Treatment of deferred proceeds when a business is sold

Some of these more complex types of business and land sales create practical tax issues which can result in tax needing to be paid upfront before any cash has been received, distorting commercial decision-making, and which are difficult for taxpayers to understand.

The OTS recommends that the Government consider whether Capital Gains Tax should be paid at the time the cash is received in situations where proceeds are deferred, such as on the sale of a business or land, while preserving eligibility to existing reliefs.

At the moment, the recommendations above are just proposals for the Government to consider when amending or creating tax legislation. However, if any changes occur to Capital Gains Tax legislation, we will be sure to update you.

Link: OTS recommends new Capital Gains Tax reforms

For many businesses, the pandemic has turned the world on its head, with many who might have expected to be profitable experiencing a loss.

Sometimes losses happen simply because the business is very new, or because costs have unexpectedly risen.

However, COVID-19 has thrown another dimension into the mix, seeing thousands of companies fail to turn a profit due to closures and restrictions placed on their business.

Relief is now available through an extension to the carry back scheme, which the Government announced as part of the Budget earlier this year.

For accounting periods ending between 1 April 2020 and 31 March 2022, this will carry back relief be extended to three years, with losses required to be set against profits of most recent years first before carry back to earlier years.

Trading losses occur if the expenses and costs of a business are more than its income for a particular accounting period. Losses are calculated in the same way that you work out your yearly profits.

Under general rules, businesses can carry back trading losses from one year and put them against profits in the previous year. This reduces the amount of profit for the previous year – less profit generally means a lower Corporation Tax bill.

But because the business has already paid its tax bill for the previous year, it can then claim a reimbursement of the Corporation Tax or Income Tax that it paid in the previous year.

Here is an illustrative example of carry back losses:

• The business made a loss of £7,000 in the accounting period 1 January 2018 to 31 December 2018, and a profit of £19,000 in the previous 12 months.
• Under the carry back rules, the company’s £7,000 loss can be offset against the profits for the previous accounting year.
• It reduces the previous year’s profit from £19,000 to £12,000. Lower profit means less tax, but because the business has already paid tax on the full £19,000, the company gets a rebate for the difference.

The Chancellor announced a temporary extension to the carry back period from one to three years for trade losses of up to £2 million (adjusted for groups of companies), for two years.

This measure will provide a welcome cashflow benefit to businesses, both incorporated and unincorporated, who have suffered increased trading losses as a result of the COVID-19 outbreak by providing extended relief for those losses, thereby generating repayments of tax paid for two additional years.

The relief is capped at £2 million of unused losses per year. Groups with companies that have the capacity to carry back losses in excess of a minimum of £200,000 will be required to apportion the £2 million cap.

For groups of companies the maximum cashflow benefit is £760,000 (£2 million at 19 per cent for two years) so claiming the extended relief is likely to be a worthwhile exercise for many.

Details can be found in HMRC’s policy paper.

Link: Changes to the reform of loss relief rules for Corporation Tax