The Value of Accountants in Property Investment, with EP Tax
Whenever I am asked whether I recommend using an accountant as a property investor, my answer is always yes. A good accountant might not come cheap, but they are worth their weight in gold when they do their job well. However, instead of me rambling on about my reasons for using an accountant with particular expertise in property, I caught up with Anna from EP Tax, to help answer some of the questions I get asked most often from clients and friends.
Please could you tell us a little bit more about yourself and EP Tax?
My name is Anna Sharlott and I own an accountancy and tax practice in Ludgershall, Wiltshire. We are a small firm with 4 members of staff and specialise in tax for property investors.
You must see accounts from a lot of different businesses and investments at EP Tax. In your experience, is property investment a profitable use of people's time and money?
Property investment is very popular, especially in our local area where lots of people reside in job related accommodation. When done correctly, property investment is a great way to grow wealth and capital.
A lot of my clients are complete beginners in property investment. In the early stages, using an accountant can seem like a big expense. When you are starting out as a property investor, what are the main advantages of using an accountant over doing your tax returns yourself?
When purchasing a property, you should always consider whether it would be better to buy it as an individual, a couple, through a company or another arrangement. The decision is likely to have huge tax consequences down the line so it’s always best to consider these before you make the purchase - so getting an accountant early on could save you a large amount of money in the long run.
In addition to assisting with property purchase decisions, accountants also know what you can and can’t claim on your self-assessment. Evidence suggests that when individuals complete their own tax returns, they often don’t include allowable costs which then results in them paying more tax.
HMRC are always getting better at using automated processes to check self-assessment tax returns. They gather financial information from letting agents, banks and employers and if your figures don’t match what they have on file, they could open a tax investigation. If you do therefore wish to file your own return, please make sure your figures match those on your letting statements, mortgage interest statement, P45/P60 document(s) etc.
One of the most common questions I get asked (which should definitely be a question for an accountant!) is whether it makes sense for people to buy in a company or as individuals. Personally, I discuss each deal with my accountant to make a decision based on what I am planning to do with the property and my personal tax situation. What are the top factors people need to consider when thinking about buying as an individual or as a company?
Well, that’s the burning question for all property investors at the moment. Unfortunately, there is no simple answer as so many factors need to be considered along with some educated guesswork. Here is an overview of the things we review with our clients:
Are you a trader or an investor?
If you are ‘flipping’ properties or being a landlord is your only/main job, HMRC will consider you to have a property business. For individuals, a property business is taxed differently to a property investment for income tax and capital gains tax. For a limited company, it is taxed the same.
Are you a higher rate tax payer?
If so, tax relief will be restricted on any mortgage interest you pay as an individual but not as a company. You will also pay Capital Gains Tax at the higher rate.
What is the likely capital gain on the property on sale?
Individuals get a capital gains annual allowance of £12k per annum (£24K if owned with spouse), if the capital gain upon sale is less than your allowance, there will be no tax to pay. Anything over is taxed at 18% or 28% (depending on whether you are a higher rate tax payer or not). This compares to a company which pays 19% tax on the whole capital gain (although indexation relief could be used if the property was purchased prior to December 2017).
Are you likely to ever live in the property?
Private Residents Relief cannot be claimed for a company.
Is the property already owned by a Limited Company?
If so, you can save a significant amount of stamp duty through buying the shares in the Limited Company instead (0.5% compared to up to 12% for an individual).
Other options to consider include the cost and additional administration of running a Limited Company, eligibility for lettings relief (available to individuals), the protection offered by a Limited Company and the mortgage interest rate difference between individuals and companies.
There has been a lot of discussion recently around mortgage tax interest relief and how the new tax law will affect landlords. Could you please explain in your words how this new tax law works?
Higher rate tax relief is restricted for buy-to-let landlords on the costs of finance, such as mortgage interest, from 6 April 2017 onwards.
These new rules only apply to individuals with residential property businesses. They do not apply to companies, land and property dealing or development businesses, commercial lettings or furnished holiday lets.
Complications for basic rate taxpayers
If you are currently a basic rate taxpayer, you may find that you are a higher rate taxpayer once the finance costs are disallowed in your rental accounts. It depends on your other income and the amount of finance costs that are added back. You will not know whether the adjustment will take you into higher rate tax without going over a series of steps in order to work out the effect of the change.
If you do become a higher rate taxpayer after arriving at your rental profits, then you will lose higher rate tax relief on your finance costs.
The change is being introduced gradually from April 2017 as follows:
We are finding that the new rules mean that lots of property investors are making a cash flow loss but a taxable profit. This means they are paying tax on their property investment but aren’t seeing any actual revenue. The tax payable therefore needs to be funded from other sources of income.
I always recommend people have an accountant who is a property expert to make sure they are both abiding by all the correct tax regulations and laws, but also making the most of the relevant expenses which can be deducted. Can you explain why it is best to use an accountant who is an expert in property and perhaps name a couple of expenses which people may not know they can deduct against a rental portfolio?
The rules around property tax are complex and ever changing so it’s important to keep up to date or use a specialist to save you the hassle and time.
One of the most common errors that we see on returns is that investors claim the full amount of their mortgage payments instead of just the interest element. We also see returns which include capital improvement costs - these should not be claimed on the annual SATR but should be added to the purchase cost to calculate capital gains tax when the property is sold.
Some of the common items you can claim are as follows:
· Management fees and letting agent fees
· Council tax, electricity, gas and other utilities which are not paid by the tenant
· Mileage to the property (or any journey made wholly and exclusively in relation to your property investment) – at 45p per mile (keep a log of your mileage)
· Repairs and renewals
· Financing costs (interest, loan arrangement fees etc) – just make sure you apply the new mortgage interest relief rules
· Training – so long as you are extending a current skill and not obtaining a new one
Finally, what is the best way for people to get in touch if they are interested in finding out more about how EP Tax could help them?
I’d like to express my thanks to Anna and the whole of the EP Tax team for spending their valuable time answering my questions. I have been using accountants for years, but I’ve certainly learnt something new! I hope this has been useful to showcase how valuable accountants can be when you are setting up your own property investment business.