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Protecting Your Buy To Let Pension Pot

Currently private Landlords are able to offset the amount of mortgage interest they pay at the same rate that they pay their tax. This is set to change from 2016 and many Landlords may find that their income from property is slashed.

New tax rules from 2016

From 2016 the taxation rules on tax relief for loan interest on buy to let are to change:

  • in 2017 to 2018 the deduction of loan interest from property income will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction (currently 20%)
  • in 2018 to 2019, 50% deduction of loan interest from property income and 50% given as a basic rate tax reduction
  • in 2019 to 2020, 25% deduction of loan interest and 75% given as a basic rate tax reduction
  • from 2020 to 2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction

This will hit Landlords hard, particularly in areas where it is not feasible to raise rents to offset the loss of tax relief.So what can a private Landlord do to maximise tax relief and income:-

Maximise tax relief available

If you are a private Landlord and part of a couple then you are each allowed your own Capital Gains Tax allowance and personal tax allowance (currently £10,600) so make the most of this by ensuring that the property is held in joint names. If the property is currently owned in a sole name this can be easily rectified by a Transfer of Equity into joint names – get quote here.

If one of you is earning less than the other you can divide the property shares between you so that the lesser earner is deemed to received more rental income than the higher earner. This can help to avoid pushing one or both of you into the higher rate tax bracket in the first place. The higher rate tax of 40% kicks in at £42,385. The 45% rate kicks in at taxable income over £150,000.

To divide the property shares you will need to:-

  • Hold the property as tenants in common
  • Have a Declaration of Trust setting out the respective shares drawn up.

Contact us for a quote on 01638 576478 or 0845 060 33 55

National Insurance Contributions and Buy To Let

Private Buy to Let Landlords should not be paying Class 2 NICs on buy to let rental income if the property they are letting is not classed as running a business. So if you are letting out your property while working away or abroad you should not be paying Class 2 NICs.

You will be classed as running a business and subject to Class 2 NICs if:

  • being a landlord is your main job
  • you rent out more than one property
  • you’re buying new properties to rent out

You don’t pay National Insurance on your rental income if you’re not running a property business – even if you do work like arranging repairs, advertising for tenants and arranging tenancy agreements.

Allowable Expenses

To minimise taxation you are still allowed to claim back genuine expenses before tax as follows:-

  • Letting agents fees.
  • Securing a tenant i.e. Costs for advertising, letting agency fees, tenancy agreement preparation, credit checking and referencing, deposit protection and creating an inventory.
  • Buildings and contents insurance premiums.
  • Maintenance and repairs, including repairs of white goods.
  • Furniture. You may currently claim 10% of the cost of wear and tear on the furniture. This is changing so that from April 2016 you may only claim back what you have actually spent rather than claiming a notional sum. You may also claim back the actual cost of replacing furniture (but not installing it in the first place).
  • Ground rent and service charges and any communal charges i.e. gardening.
  • During periods when there is no tenant you may claim back the cost of any utility bills and council tax which you pay
  • General expenses – you may claim for stationery, travelling to and from the property and phone calls are all legitimate expenses.
  • Accountancy fees.
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