Tax Changes – affecting buy-to-let residential properties

Begin with the end in mind

It is always essential to keep a clear head and remain focussed on your goals before considering any new challenge or possible opportunity. Property market conditions, tax and legal changes, should all be assessed in relation to their impact on your priorities.

For example, if your priority is long-term capital accumulation, focus on which market development will help or hinder achieving maximum capital appreciation on your next deal?

Some of our clients seek maximum yield in order to generate income, and so for them gross rental yield and monthly costs are the key factors they seek to control.

If your priority is streamlining your asset portfolio, seek tax and legal arrangements which allow you to concentrate numerous properties within one structure, for example an investment company whose assets are all your properties.

There is not a single ideal way to structure every property portfolio.  You must seek a tailored solution that best fits your current circumstances and your long-term goals.

Next, concentrate upon implementing your strategy, and sticking with your plan without getting distracted. It has been said many times, if you chase two rabbits at one time you will not catch either one.

Bookkeeping and accounting issues

Before thinking about tax payable on profits, your business must accurately record all its transactions and provide reports to all interested parties. This recording starts within your bookkeeping system whether that is Sage, Xero, or Quickbooks.

Two changes are driving the need to upgrade bookkeeping software systems and stop using spreadsheets for bookkeeping.

All businesses with turnover in excess of the VAT threshold must keep digital records for reporting VAT returns (as of April 2019). Not only will this mean the use of bookkeeping software, it will also require staying up-to-date with recording all transactions in order to meet the tight reporting deadlines.

The Letting Agent Code of Practice will require your bookkeeping software to capture more detailed records of tenant-agent-landlord payments into and out of at least one dedicate client bank account.

ad+ Chartered Accountants have designed and operated bookkeeping, payroll, and accounting systems for letting agents, property owners, and estate agents. In recent years, we have concentrated on cloud-based systems, Xero and add-on Apps, because of the added flexibility and convenience these systems give to a business owner.

By integrating your back-office administration with your bookkeeping and accounting software we can increase the accuracy of your data, eliminate several administration steps, and speed up the daily processing with your business.

Tax Planning and HMRC

Tax planning is always an integral part of ad+ advice, and so we will guide you through the upcoming tax changes. ad+ Chartered Accountants seeks to design business and investment structures that match your personal style and goals, and is based upon sensible legal arrangements which minimize the total amount of tax paid by you, your family, and your business.

In recent years, HMRC have taken an aggressive stance against complex deliberate tax avoidance. Although these tax strategies may be legal, they are likely to encounter so much resistance from HMRC that they should now be avoided in most cases.

The vast majority of ad+ clients are businesses and their owners based within Scotland. The sectors represented range from property owners and letting agents through to development and construction companies. Therefore, ad+ really knows how guide you toward truly practical and effective Scottish accountancy and tax solutions.

 

Tax and Investment Return

All taxes reduce net investment returns, and so we consider both factors side-by-side.

Additional Dwelling Supplement

Within Scotland, the Land and Buildings Transaction Tax Additional Dwelling Supplement is a tax which hits buy-to-let property owners. It represents a significant extra up-front cost, and it must be included in your net return calculations.

Loan interest rate

Although interest rates are exceptionally low at the moment, it is essential to realise that they could, and probably will, increase during the life of your property portfolio. It is impossible to know how high, or when, interest rates will rise. To verify the financial robustness of your property portfolio have your accountant calculate a series of probable net profit scenarios where the loan interest rate is set at several notches above the current market rates. This exercise will also show you the impact on your net profit, which helps you to make long-term investment and borrowing decisions.

In a highly leveraged portfolio, movements in the rate of loan interest charged can be the biggest single variable affecting net returns. Unless your loans are fixed rate, you will have no control over that variable, other than to sell encumbered properties.

Ownership structures

The most common choice of structure for holding your property portfolio is either personal ownership, corporate ownership, or pension fund ownership. Each structure has different legal and tax characteristics. In other words, they have advantages and disadvantages which depend upon your individual circumstances and goals.

The rate of tax payable on profits is noticeably different:-

• Sole trader/Partner: 40% income tax (for higher rate tax payers).
• Company asset: 20% corporation tax.
• Pension fund asset: 0% (can only be commercial or industrial property)

ad+ Chartered Accountants and its sister company ad+ Financial have designed integrated family wealth strategies which have included all sorts of permutations of sole trader, partnership, company, pension scheme, and family trusts.

Getting practical help

Contact David Charles to discuss how ad+ Chartered Accountants and can help you optimize your property investment portfolio or letting agency.