The Fizz! Blog

MTD for Landlords - what do you need to know?

UPDATE, DECEMBER 2022:  Nothing!  This initiative has now been postponed until (at least) 2026, and only landlords with revenue (initially) of £50,000 a year will now be affected.  But, here's what we said back in October anyway...

The government has a long-standing drive to make us report income to them a) digitally and b) more frequently - “Making Tax Digital”.  The initial phases of this forced all VAT registered businesses to submit their quarterly VAT returns online, with an unbroken link between the return and the source records.  This has basically worked well.  For businesses used to keeping paper or spreadsheet records, the jump they probably made to accounting software will have involved a bit of work, but most businesses were using software anyway, and many of those that weren’t have found life better with it.

The next phase will be a bit less smooth.  Making Tax Digital for Income Tax is going to force all sole traders and landlords with revenue of over £10,000 a year to make quarterly reports of their income and costs to HMRC, from April 2024 (partnerships won’t be brought in until 2025).  This won’t (for the time being, anyway) affect the calculation of annual profits, or the timetable for payment of tax, it’s just to give HMRC more timely in-year information to analyse.  Many or most of the sole traders will be using software already, so more regular reporting shouldn’t be too much of a burden for them.  Virtually none of the landlords will.

For smaller landlords - those with gross rents below £85,000 - the minimum required report will be rather simple; total revenue and total costs.  Not really enough for HMRC to do much analysis of.  Larger landlords will be required to file costs in more detailed categories.  99% (at least) of individual landlords are going to fall into the former category though; there aren’t many with rents of over £85,000 a year.

If you have gross rents under £10,000 a year, you don’t have to do anything in the first instance.  But if your revenue goes over that level, quarterly digital reporting becomes compulsory - and you can’t come out of the system unless you cease to have any such income, or it’s below £10,000 for three straight years.  Effectively, sole traders will be in until they retire, landlords will be in until they sell their properties.

It’s important to note that the £10,000 is revenue or gross rents, not profit.  So a sole trader with £12,000 of revenue and £9,000 of costs, making £3,000 of profit a year, must sign up, and so must a landlord with £13,000 of gross rents and £5,000 of costs.  And if you’ve both sole trader income *and* rental income, it’s the total that’s important.  So someone with £8,000 of sole trader revenue and a flat rented out for £500 a month must sign up - that’s £14,000 of income in total.

On the more generous side, if a couple own a rental property, then the £10,000 threshold is per owner - so if gross rents are £18,000, split 50/50, there’s no need to sign up to MTD (although, less generously, if the gross rents are £21,000, they will *both* have to make reports - a report is for a single individual).  And if you’ve income that doesn’t have to be reported on a tax return at all (like rent a room income below £7,500) then that’s disregarded entirely when deciding if you have to sign up or not (although, if you’re in for some other reason, the rent a room income *does* have to be disclosed in the MTD reports!).

One thing that on the face of it seems problematic is that owners of Furnished Holiday Lettings (FHLs) will have to make a different report in more detail - but you don’t always know if your property qualifies as an FHL until after the end of the tax year!  Presumably the suggestion will be to report as if it were an FHL.  At least owners of those properties are pretty likely to already be in the habit of keeping decent contemporary accounting records.

There will be some practical problems.  There’s supposed to be a digital link between the report you make and the underlying records.  But what if the underlying records are necessarily kept in different places?  Perhaps you own one property outright and 25% of an unconnected one with a group of other owners.  You’re going to have to aggregate those figures somehow and then report them to HMRC.  There’s a fudge called “bridging software” that can report from Excel records, not from accounting software, and it may come into play.

So, what should you do in terms of changing your record keeping?  At the moment, probably nothing.  Previous phases of MTD were repeatedly delayed; the general feeling is that this phase of MTD is 99% likely to happen, but maybe only 50% likely to happen in 2024 as planned.  When it does happen, we’ll be helping clients set up a system that will work for them.  FreeAgent have introduced a special version of their excellent bookkeeping software just for landlords, and for portfolio landlords who could actually benefit from more advanced tracking of multiple properties there are products like Hammock.  And for very simple cases, it might be that Excel and bridging software is fine.  For now, the important thing is just to know that it’s (almost certainly) going to happen!

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Should I sell my rental property now to avoid a bigger tax bill later?

If you’ve got a rental property that you’ll eventually sell for more than you paid for it, then there’s a good chance you’ll have some Capital Gains Tax (CGT) to pay when you come to sell it. Sometimes people worry that the longer they keep the property for, the more profit they’ll make when they sell it (because of rising house prices), and therefore the more tax they’ll pay. It’s worth remembering, though, that the highest rate of tax on capital gains is currently 28%, so if waiting for a year meant making an extra £10,000 of profit, your tax bill would increase by £2,800, but you’d still be £7,200 better off!

Things can seem a bit more complicated if you’ve lived in the property for part of the time you’ve owned it. When you sell your own home for a profit, the gain is generally exempt from tax. When you sell a property that was your home for part of the time you owned it, but has been let out for the rest of the time, then the gain is split into two. The portion of the gain that relates to the time you lived there is exempt from tax, and the portion that relates to the time you were renting it out is taxable.

It’s quite common in these circumstances for people to worry that they’re holding onto a property for “too long”, and creating an unwanted tax bill. In the majority of cases, though, it’s very unlikely that keeping the property for longer will leave you worse off. For example:

If you bought a property for £200k in 2018, lived there for three years, rented it out for one year and then sold it for £240k, you’d make a gain of £40k. You lived in the property for three out of four years in total, so ¾ of the gain (£30k) would be tax-free*. So only one year’s worth of gain (£40k x ¼, i.e. £10k) would potentially be taxable. Worst case scenario, you’d pay tax on that at 28%, so a little under £3k, leaving you with £37k profit after tax.

Of course, the longer you own the property for and continue to rent it out, the bigger the portion of the gain that attaches to the period it was rented, leaving a higher proportion of the gain exposed to tax. So if, for example, you held onto the property until 2028, you would have lived in the house for three years out of ten years in total, so only 3/10 of the gain would be tax-free, instead of ¾ of the gain in the first scenario. But having owned the house for an additional six years might mean that you sell it for quite a bit more – let’s say £300k, meaning a gain of £100k. If that were the case, then the tax-free portion of the gain would be £30k, and the taxable portion would be £70k. Worst case scenario, you’d pay tax on that at 28%, so around £20k. But you’re still left with £80k of profit after tax. So despite the fact that you’ve got a much bigger tax bill, you’ve still got £43k more in your pocket.

One situation that could result in you being worse off is if you kept the property for 10 years, but the value didn’t increase in that time. If you sold it in 2028 and still only got £240k for it, then 3/10 of the £40k gain (£12k) would be tax-free, and 7/10 of the gain (£28k) would be taxable. Tax on that could be up to £8k, leaving you with £32k in your pocket, i.e. £5k less than if you’d sold it in 2018 for the same amount.

But the key point is that the potential size of the tax bill alone is a red herring. Whether or not you keep or sell the property should really be an investment decision, and not be driven by concerns about tax. If renting the property for a few more years means you’ll be able to sell it for a higher price in the future, then although you’ll have a bigger tax bill, you’ll still be left with more in your pocket in the end. The only time the tax can make you worse off is if you hold onto the property for longer and the price stays around the same or falls. But if you thought that was going to happen, you probably wouldn’t hold onto it anyway! So in the vast majority of cases, it’s fine to make your decision based on when you think it’s a good time to sell the property in terms of your expectations about the housing market and whether you feel the property is a good investment for you, rather than being driven by worries about CGT.

There are a couple of situations where tax *might* be a consideration, though:

• If the government announced a change to the rate of CGT, that could be a legitimate reason to consider the timing of selling a property. If you knew that the rate was going to increase significantly next year for example, you might prefer to sell now.

• The first £12,300 of capital gains you make in any tax-year are exempt from tax, so if you’ve already sold other assets that are subject to CGT in the current year, you might want to wait until the next tax year to sell the property, so that you can make use of the following year’s exemption.

But those things aside, the overall message is that you’re always likely to be better off by selling your rental property when you can get a good price for it and it’s the right decision for you from an investment point of view. Selling at the time that makes you the most profit will likely mean a higher tax bill, but you’ll still have more in your pocket in the end.

* This is a slight oversimplification, because the final nine months of ownership are also tax-free (this is always the case for a property that was your only or main home at some point), but we’ll set that to one side for now as including it would make the examples more complicated, and it rarely changes the overall picture.

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Should I put my Buy To Let property into a company?

Owners of rental properties pay tax on the profits, and often the biggest cost associated with the property is mortgage interest. Over the last few years, the tax relief on that interest has gradually been tapered down for those with higher income, and people who might once have saved tax at 40% (or more) on that interest now save tax at a maximum of 20%.

As a result, the idea of putting a Buy To Let property into a limited company is often floated as a possibility. Is it a good idea? For most people, on balance it’s unlikely to be. Here are a few significant factors:

• If it’s a property that you already own, then transferring it to a limited company will be taxed as if you’d sold it at market value. If it’s gone up materially in value since you bought it, you’ll probably pay some Capital Gains Tax.
• There’ll also be Stamp Duty to pay on such a transfer; Stamp Duty on the transfer of a property from an individual to a company is calculated on the basis of market value, not the amount paid.
• Although the tax-efficiency of the rental income in the company might be a bit better, it’s quite likely that the tax position when you come to sell the property might be worse. An individual has a tax-free allowance for capital gains and only has to pay tax on profits above that Annual Exemption. A company pays tax on every penny. And then, as the owner, you’re likely to want to get the profits out of the company - and you’re likely to pay tax then as well. That kind of double taxation is always an issue when appreciating assets are held within a company.
• The professional fees you’ll incur in having a company’s accounts and taxes properly looked after are greater than those for an individual, so a bit of the year-on-year tax efficiency is absorbed by that anyway.
• It’s often the case that it’s more expensive for limited companies to borrow than it is for individuals.
• Fundamentally, it’s a big punt on the tax regime remaining stable for a long time, and such punts are pretty risky. It’s easy to imagine the rules changing to eat away at tax efficiency for the company ownership route - and you’ll still have paid the switching costs if you used to own the property personally, and you’ll still be stuck with double taxation on exit!

A limited company is more likely to be indicated where there are multiple properties and where there’s a really long term vision for the business. If it’s intended that a rental business will have multiple properties and it might be contemplated that it might even last generations, a limited company could well be indicated. But in 90% of situations, our view is that personal ownership is still more appropriate.

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I'm a limited company owner - how do mortgages work?

One of the most common concerns that people have when starting to work through a limited company is mortgages. In particular, they worry that the typical way in which limited company owners get paid - a relatively small PAYE salary with most income coming from dividends - will mean they can only take out a tiny loan based on the salary part. If you’ve obtained a mortgage before and the lender principally wanted to see your payslips, that’s quite understandable!

The good news is - that isn’t the case. No lender looks at a company owner’s salary and their salary alone.

Historically, when looking at the borrowing capacity of a limited company owner, lenders would disregard entirely how much money the owner was extracting from the company, by whatever mechanism. Instead, they’d look beyond the owner, and look at the underlying profitability of the company and how much the owner *could* take out. The amount they’d lend would be based on the underlying profits of the company, not the tax-planning decisions of its owner.

Then came the financial crash of 2007-08. Lenders panicked, and decided that any profits you were sheltering inside your company for the future were technically at risk if your company went bust, and so they’d only lend based on how much you were actually taking out. They didn’t care about the split between salary and dividends in the slightest, so that mix of a small salary and bigger dividends wasn’t affected, but it did mean that there was a period when some company owners did have to take bigger dividends out of their company than they really wanted to in order to satisfy the requirements of a bank or building society.

For a long time now, we’ve been on an even keel again. The vast majority of lenders have gone back to the old basis and are interested in how much you *could* take from your company, not how much you *do* take. There are one or two who still consider only what you’ve actually taken, but they’re few and far between and it only really matters if you’re with one of them already and are keen to remortgage with them. And none of them care about the split between salary and dividends.

It’s admittedly generally a slightly more time-consuming process for a limited company owner (or any other self-employed person) to get a mortgage offer than it is for a PAYE employee.
Lenders all cleave to the idea that an employee is inherently a less risky proposition than a business owner and ask for less evidence of income from them. This is clearly preposterous - a full time employee’s income could disappear overnight if they lose their job or their employer goes out of business, whereas many people who work for themselves are getting income from multiple customers, which is clearly less perilous. On the other hand, to be fair to lenders, assessing the stability of each applicant’s job and employer robustly would be unfeasible.

And for a self-employed person to be able to choose from a wide range of lenders and deals, you’re probably going to want to have a couple of years of business under your belt - one set of accounts will get some lenders interested, but two will increase the number. That can sometimes rationally lead to people staying in PAYE employment (or as a sole trader), a little longer than they might otherwise do, so as to be able to get a mortgage or remortgage before beginning to work through a limited company and restarting that two year clock.

But that’s just the way it is. It does mean that a limited company owner is generally well advised to work with a mortgage broker who is experienced in working with self-employed people. They’ll know which lender is interested in which kind of borrower right now, and what kind of evidence of income each is looking for. You can’t prepare some kind of standard “pack” that’ll be presented to any lender. Most of them are likely to require a certificate or reference from your accountant vouching for the numbers - and they all have their own format!

But there’s no need to worry that a limited company owner is at a serious disadvantage when it comes to mortgages. They get them every day.

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How do I get my hands on my Business Rates grant?

As part of the government's package of business support, a lot of businesses that are the ratepayer for commercial premises but pay little or no Business Rates are getting cash grants.

Initially the government said that the payment of grants to businesses that claim Small Business Rates Relief (who should get £10,000) and retail, hospitality and leisure businesses (who should get more if their property has a rateable value between £15,000 and £51,000) would be dished out automatically by local authorities, and that businesses should sit tight and wait to be contacted.  But in practice, that's not what all councils are doing.

We've already seen some councils contacting relevant businesses and paying the grants out right away where they hold bank details for the ratepayer.  That's how the system was expected to work.

However, it turns out that other local authorities are making business apply.  That's what our local council, South Oxfordshire District Council, for example, are doing:

http://www.southoxon.gov.uk/business/business-rates

Moral of the story, if you're waiting to be contacted, it'd be worth looking at the website of your council.  And don't forget that you should be eligible for the £10,000 grant, even if you pay no Business Rates at all because your premises qualify for Small Business Rates Relief.  But if you don't occupy commercial premises, or you do but you're not the ratepayer yourself, there's no grant available.

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How much can I charge my client for mileage?

How much can I charge my client for mileage?

Quite often we're asked "Is the mileage rate still 45p"?  To which the answer is - 45p is still the maximum amount you can reimburse an employee tax-free for the business miles they drive in their own car in a year (for the first 10,000 miles).  But that's all it is.

People frequently have the idea that 45p is somehow the "correct" amount for mileage in absolutely any scenario.  For example, recharging mileage to a client.  There's nothing special about 45p in that context - if you can agree £45 a mile, then fine!  It'll be taxable income in your company, of course, and a cost in theirs.  In reality, 45p a mile does get used often in that context, but there's no technical reason it has to be.

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A big change from April when you sell a Buy To Let

If you sell a Buy to Let property (or any other property that's not clearly your own home, for that matter) at a profit, it's pretty likely you'll have to pay Capital Gains Tax.  At present that's paid via a Self Assessment Tax Return for the year in question.  So if someone realises such a profit today, it's going to go on their tax return for the year ending 5 April 2020, and that means that the tax is payable in January 2021.

By the time the payment deadline comes around, it's not uncommon for there to be a problem.  The seller hasn't got the money any more.  It's reasonably common for people to labour under the misapprehension that if they use the money to buy another property, then the profit somehow isn't taxable.  Or for them to believe that there's some interaction with mortgages and repayments that makes a difference.  But those things aren't relevant in the slightest.  Or they might simply think that there's no tax on selling a house.  There is, unless it's unambiguously and genuinely your own home.

From 6 April 2020, therefore, the rules are changing.  If you sell that BTL and make a profit, you've got to tell HMRC and pay the tax within 30 days.  It'll be impossible for many people to be 100% sure of what that tax bill will be - the tax rate on capital gains in someone's basic rate tax band is currently 18%, and on gains above that 28%, and you might not know how much of your basic rate band is going to end up being used up by other things.  But that's fine - you just pay your best estimate, and then the difference can be sorted out later on.

Of course, the people in the best position to warn sellers about this are the conveyancing solicitors.  But a similar regime came in for overseas sellers of UK properties already, and we can tell you that there's no evidence at all that solicitors are advising sellers about it, and we've had to belatedly help more than one seller declare and pay the tax to HMRC.

Even if you're not planning on selling any time soon, one practical thing to do now might be to make sure you've got all the details of how much a property cost, easily and clearly available.  That way, you won't be frantically looking for them in years to come when faced with an unexpectedly tight deadline for paying the tax.

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