Buy To Let

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1. Buy To Let:

1. Self Assessment Annual Return - UK property (April to March).

2. Tax is paid on "profits" not rental income - a mission may be to earn an annual "profit" of minus one pound.

3. Tax cannot be negative when profits are negative. National insurance payments are due if renting the property is treated as a business.

4. Detailed records are mandated by law for the duration of the purchase, rental and sale of the property. Capital gains liabilities can span a life time.

5. VAT does not offer any benefits and so it can be overlooked and all amounts treated as gross values.

6. The first 1000 pounds of rental income from a property is tax free as a "property allowance".

****QUERY****

(1) Is the property furnished or unfurnished?

(2) Has a letting agency been involved to check the tenant?

(3) Does building and content insurance exist?

2. Allowable Expenses: wholly and exclusively

1. Letting agency fees - do it your self and earn an extra thousand pounds.

2. Legal fees - do it your self and earn an extra thousand pounds.

3. Accountancy fees - do it your self and earn an extra thousand pounds.

4. Building and Content Insurances - Towergate.

5. Interest paid on property loans, but not any capital repayment.

6. Maintenance and repairs (kitchen, bathroom), but not capital improvements.

7. Utility costs for electricity, water, gas, sewerage. EPC certificate

8. Council tax (when the property is empty).

9. Ground rent, security and service charges (if any).

10. Cleaning maintenance to gutters, eaves, soffits and windows.

11. Administration fees for managing the property rental - printer, phone calls, stationery, travel.

12. Replacement of domestic items like carpets, curtains, beds. sofas, fridges, crockery and cutlery.

3. Capital Gains:

1. Every cost to improve the property that is not an allowable expense, can be used to offset any capital gain.

2. Evidence of the purchase price and every capital improvement must be retained to minimise capital gains taxes. Capital gains is payable on any secondary residential property where the gain is greater than 11730 pounds at a rate of 18% of the profit.

3. Tax Year:

(1) The current tax year is April 2019 to March 2020 to record a set of twelve monthly statements.

(2) Annual return and tax (if any) is payable up to 31 January 2021, however HMRC should be informed of the rental arrangement before April 2020.

(3) Annual return is mandated even when no tax is due to be paid - evidence is needed.

4. VAT Registration:

1. In general, every household should operate as a VAT registered business so a 20% reduction can be made on many purchases.

2. Buy to rent has fees and costs with few VAT benefits - no VAT on insurance or interest payments.

3. For simplicity, VAT can be ignored and all transactions recorded as gross amounts that include VAT when applicable.

5. Landlord Liabilities:

1. The property must be safe and free of health hazards.

2. All gas and electric equipment must be safely installed and maintained.

3. Provide a EPC for the property.

4. Protect the tenants deposit in a government approved scheme.

5. Check that the tenant has the right to rent the property.

6. Give your tenant a copy of the "how to rent" checklist.

7. Fit and test fire and smoke alarms and carbon monoxide alarms.

8. Council may choose to do a Housing Health and Safety Rating System inspection.

9. Mortgage lender must give permission if the property is to be rented.

10. Landlord should give the tenant 24 hours notice before entering the property to make an inspection or repairs.

11. Rental agreement should include the right to review and increase the rent once per year.

6. Record Keeping:

1. Every financial transaction must be documented as income (rent) or outgoing (expense) - the online diary is a simple data entry method.

2. Transactions are accumulated with monthly totals that provide a summary of trends.

3. Transactions are accumulated with annual totals from April to March for annual return. UK tax year is 6 April to 5 April but this can be reported as 12 monthly totals as above.

4. Transaction is a form showing:

(1) Property identifier (implied by name of diary)

(2) Date of transaction (implied with time)

(3) Gross amount as pounds and pence

(4) VAT state list as included or extra or none (insurance and bank charges do not include VAT)

(5) Cost code list as rent, utility, repair, admin, insurance, etc..

(6) Comment

5. Example:

(1) Monthly council tax bill: -35 (while property is vacant)

(2) Monthly utilities bills: -25

(3) Monthly insurance bills: -75

(4) Monthly maintenance bills: -55

(5) Monthly administrative bills: -45

(6) Monthly cleaning bills: -45

(7) Monthly interest on loan bills: -165 (no capital repayment)

(8) Monthly rental income: +525

(*) Monthly balance: +80 profit as "property allowance" with no tax to pay

6. For every pound of expenses that you cannot justify with a receipt, you will pay 20 pence tax in the January following the tax year end in April. This is just an example to provide an overview of what is possible.

7. DO NOT CLAIM:

(1) Home improvement costs - only claim maintenance and repairs

(2) Full amount of mortgage that includes capital repayment - only claim interest fees.

(3) Private phone calls - only claim phone calls with respect to renting the property.

(4) Clothing - no uniform is accepted.

(5) Personal expenses - only claim travel allowance of 45 pence per mile for trips to the property.

(6) Landlord labour time cannot be claimed, but agency fees can be charged.

7. Short Term Furnished Lets:

1. Short term holiday furnished lets are treated as a business with some benefits over a long term unfurnished let.

2. Capital costs for furniture, fixings and equipment are permitted for a holiday let.

3. Profits count as earned income when it comes to pension payment requirements.

4. Furnished holiday let regulations:

(1) Property is offered to let for at least 210 days per year

(2) Property is actually let for more than 105 days per year

(3) No single let is for more than 31 days - monthly reporting

(4) Charges are at market value for similar properties in the area

8. Personal Tax:

1. From 6 April 2020, the rules change: tax credit is limited to 20% of the rental income.

2. This is a new pending rule to cause buy-to-rent to be moved into being a commercial business, rather than a domestic sideline.

3. As soon as 2 or 3 properties are involved, then the landlord has little choice except to make it into a part time business.

4. With only one property, tax allowances may be permitted as so small as not to be of any great significance.

5. Mission:

(1) Up to 1000 pounds per year profit is permitted and not taxed as a "property allowance".

(2) Profits greater than 1000 pounds per year is normal income that is taxed at 20%.

(3) Where the rent minus permitted expenses shows a profit of less than 1000 pounds per year, then no tax is due.

6. Ignore the current transition of interest tax credits, the new law from April 2020 is that mortgage interest is only a tax credit - you get a 20% reduction on the interest only. The alternative is to STOP being an individual landlord and register a property company with normal company benefits.

9. Limited Company:

1. Every family needs a VAT registered company to minimise costs, but being a landlord for just one property makes a limited company desirable rather than a necessity.

2. For simplicity, if a company does not exist, then buy to rent does not make it mandated.

3. In effect, record keeping for the buy to let property is virtually identical to operating a limited liability company.

4. The extra cost of registering a limited liability company to act as the letting agency is 13 pounds per year - all company expenses are deductible.

5. Until other income that includes VAT is added, the benefit of using a limited company is the same as not using a limited company - the accounts are the same.

6. CHANGE:

(1). Until Apr 2017, interest charges could be set against tax liabilities for a company and an individual.

(2). By Apr 2021, interest charges can be set against tax liabilities only for a company - its good to be a company landlord.

(3). By Apr 2021, an individual may claim only basic tax relief on rental income - its bad to be an individual buy-to-let landlord.

7. Company corporation tax is 19% and will become 18% - that is less than 20% income tax and has no liability towards national insurance fees. Company annual dividend allowance is 2000 pounds free of tax.

8. A limit is that VAT threshold is 85000 per year, so all rental income must be less than 85000 pounds per year for any one property company - any number of independent companies can be formed. The facilities management company must not be VAT registered because then all charges would be plus 20% VAT.

10. Facilities Management:

1. Buy to Let is a responsibility on the landlord that can be subcontracted to a facilities management firm - the landlord may be a shareholder.

2. Accountancy firms typically charge 20 pounds per month to the landlord or 50 pounds per month to run a limited company - these costs are avoidable.

3. Financial planning cannot be provided without suitable liability insurance that does not exist.

4. Preparation of all accounts and returns can be fully automated.

5. By subcontracting all responsibilities, expenses can be made to balance revenue as a means to minimise taxes.

11. Partnerships:

1. Buy to let can have tax benefits when more than one person are owners in common to the property.

2. One person may own 99% and the other may own 1% of the property for capital gains purposes. Say a young person is given a 1% ownership where the first 12500 pounds per year income for that young person is free of tax.

3. But both may elect and inform HMRC that rental profits will be split by any percentage they choose to minimise taxes.

4. The person who owns 1% may not have any other income and so can be assigned 99% of the rental profit.

5. This has the effect of minimising the taxes paid by the 99% owner and giving 99% of the profit to the 1% owner who has an annual allowance of 12500 pounds before any tax is due. A person under the age of 18 cannot own property (except via a trust fund). On a persons 18th birthday, they can be gifted a small proportion of the property as "owners in common".

12. Bespoke Application Service:

1. A Bespoke Application Service (BAS) has been provided for the landlord to be able to manage their accounts using a simple online diary of tasks.

2. Each task is and event with evidence as an expense or rent transaction.

3. Click a button to view a monthly management report - no extra work to be done.

4. Click a button to view the annual return with any profit and tax liability - no extra work to be done.

5. Because 75% of all landlords just break even, HMRC expect a new landlord with a single property to pay no tax, but they must provide good accounts. The annual return is an ethical statement because much of the data cannot be verified by HMRC unless a crime is suspected and a detailed investigation undertaken.

13. Inspection:

1. Regular engagement between landlord and tenant is recommended. The landlord has very different priorities to a letting agency.

2. A monthly inspection may be scheduled at the convenience of both parties. Inspection means taking photographic evidence of the condition of appliances, gutters and paint work.

3. The inspection is an opportunity for the tenant to suggest things that need repair or maintenance.

4. The inspection avoids the need for the tenant to make a complaint.

5. All repair and maintenance work done when first identified is much cheaper than when it becomes an emergency. All repair and maintenance work done adds to and retains the long term value of the property.

6. A Bespoke Application Service (BAS) can be provided by the landlord to the tenant as a means to communicate. The tenant is assigned their sign-in details by the landlord so the tenant can request the same details again when they are forgotten. The tenant has read-only access to their details, but can author a new request to the landlord.

7. The tenant needs to be able to view their rental statement and associated tenancy documents, council tax, utilities and other details. This proves the landlords obligation to provide the tenant with a copy of all relevant documents and certificates via a private online web page.

8. The tenant needs to be able to make a request or complaint directly to the landlord who replies within 24 hours with a promise to look into the matter and have a solution by the next scheduled inspection date.

9. Evidence needs to be collected that can be presented to a court - a dispute is less likely to happen when both parties are fully aware that evidence has been recorded.

10. All money spent on maintenance and repairs this year increases the potential rent for all further years - it will be repaid ten times over.

14. Residual Income:

1. Rich people are those that have stopped selling things once and start selling a service where they are paid month-after-month for the rest of their life.

2. To sell a house will earn a profit that will be taxed and used to buy assets that reduce in value towards zero.

3. To rent a house will earn a profit every month for the rest of your life - and more.

4. Facilities Management is a service to manage a property on a month by month basis.

5. Only the stupid will build a property and then sell that property to make one short term profit. Facilities management builds a property and then exploits that property over and over again with residual income.

6. Capital gains tax means nothing when the property is not for sale and will earn much more from monthly rent over the next 100 years. Facilities management may include rebuilding and improving the building many times to extend its life and increase its rental income.

15. Annual Investment Allowance (AIA):

1. Property Capital Allowance (PCA) can be claimed on "plant and machinery" on an annual basis as Annual Investment Allowance (AIA) for a business. Buy-to-let of one domestic property may be operated not as a business, but only a property business can have property capital allowances.

2. Plant and machinery means bathroom and kitchen equipment that is not structural.

3. Carpets and Lino are plant and machinery - they wear out and must be replaced as a capital allowance.

4. Losses on plant and machinery can be carried forward for twenty years - until a profit is made.

5. ACTION:

(1). Prepare a details inventory of everything in every room in the property - size, weight, voltage, colour, material and approximate cost to be replaced.

(2). Photographic evidence would help because this "passport" will be active for the next fifty years.

(3). What type of window frame, what type of door, quality of the insulation in the roof, type of eaves, soffit and fascia, size, type and state of the drains.

(4). Utilities: where does the water come in, capacity, size, switch off, what type of pipes, where do the pipes go?. Same for gas and electricity.

6. Passport: Strategic direction is to build a 3D information model of the building so any question can be answered regarding repairs and maintenance - facilities management.

7. Where more than one property is owned, then each property must have a passport as some allowances may be transferable from property to property.

8. Imagine in 20 years time when every bill has been captured and can be viewed in a glance, when every material is clearly documented and can be upgraded with an annual allowance. Property is a business with fifty year consequences on what is purchased, when it is purchased and what is an allowance. An income for life is a serious business that demands a serious method of working and information model - data increases the value of the property.

16. HMRC Engagement:

1. Form 17 Declaration of Beneficial interest in property and income.

2. Tenants in common or Joint Tenants must be registered with HMRC - the split of ownership can be changed as needed to match any taxation requirement.

3. HMRC will assume a 50:50 split unless a form 17 has been provided to state otherwise.

4. Whoever has the maximum tax allowance is said to own 95% of the income so the big tax payer is only paying tax on 5% of the income.

17. PPR Letting Relief:

1. Capital gains tax is payable on the profit made between the purchase price and the sale price.

2. Where the property has been the owners main residence (PPR), then a letting relief of 40K per person is allowable.

3. With two tenants in common, that means the first 80K of profit is allowable against capital gains tax.

18. Fittings and Furnishings Claim:

1. Any replacement fittings and furnishings can be claimed in full where the replacement is similar to what already existed.

2. It is not permitted to upgrade to a higher standard or quality and claim the whole amount as an expense.

3. Carpets can be replaced as an expense, including delivery and carpet laying service.

4. A washing machine can be replaced, but not a washer-dryer. A fridge can be replaced, but not a fridge-freezer.

5. A monthly cleaning service may be outsourced to a company - gutters, fascia, windows and window frames.

6. A monthly maintenance service may be outsourced to a company - all internal appliances must be checked and serviced.

A1. Bespoke Application Service (BAS):

1. Design is ongoing - your ideas will be welcomed - what do you need?

2. Annual Return: personal taxation based on profit as income minus expenses. Every detailed transaction is recorded.

3. Find a Tenant: is a bit like recruiting with the added requirement to do due diligence on if the person is permitted to rent in the UK (if not born in the UK).

4. Contract Renewal: is is easier than finding a new tenant, but the annual rent price rise will cause some to question the procedure.

5. Rent Collection: is just like invoiced payments with a fixed date to be paid each month - no flexibility.

6. Repairs: are to be managed with suppliers contracted to do detailed work packages for a fixed quotation price - no work is started before a fixed price is in writing.

7. Inspections: are to be managed like repairs based on fixed price quotations in writing. EPC and GAS certificates are subcontracted to a friend of a friend.

8. Marketing: is part of finding a tenant and contract renewal - PR information that is shared with the public via social media.

9. Insurance: may have to fit in somehow - not sure yet.

A2. Property Business:

1. Everybody says they want an income for life but do not know how to do it - operating their own property business is one way to do it.

2. Headlines today is buy a house for 280000 and rent it for 1300 per month for life - index linked increases every year with a 7% return on investment.

3. Such headlines overlook the hard work needed to run a successful property business and to understand that rent is not profit.

4. Every family need their own property business that includes a domestic repairs and maintenance business.

5. When a distressed house comes on the market at a very low price, then the domestic repair and maintenance business subcontracts the following:

(1). Kitchen units: Carefully remove and replace - many fittings and fixtures will be reusable for later repairs.

(2). Bathroom fittings with mirrors: Carefully remove and replace - some fittings and fixtures will be reusable for later repairs.

(3). Central heating boiler and radiators: Carefully remove and replace - many fittings and fixtures will be reusable for later repairs.

(4). Water pipes: remove and replace - some fittings will be reusable for later repairs.

(5). Gas pipes: remove and replace -some fittings will be reusable for later repairs.

(6). Electric wiring and distribution board: remove and replace.

(7). Plasterboard: to many walls and ceilings and skim flat.

(8). Install fire alarms to each floor and CO2 monitors where any gas appliances are installed.

6. The above trades give an indication of the kind of domestic work that must be carried out by every property business as repairs and maintenance. Much of the work will be subcontracted with fixed price quotations, but managed by the property business for life.

7. A property business needs a large storage space for equipment and reusable supplies - free safe storage may be a cause of higher profits.

8. Remember that maintenance that is an improvement cannot to claimed as an expense against income, but the property business alone will decide what is maintenance and what is an improvement. All maintenance is an improvement and a cause for higher rents for every following year.

A3. Rental Business:

1. Rental property has a wide spectrum of potential tenants - the corporate executive who needs a place to stay overnight may be the best tenant.

2. A property can be set up for the corporate executive to be able to stay over as an alternative to a hotel.

3. The executive property is furnished to a similar standard as a holiday flat.

4. A fridge costs 100 pounds and lasts for 5 years - less than 2 pounds per month on the rental.

5. A fridge, freezer and washing machine cost 400 pounds and last for 5 years - 5 pounds a month on the rent may be what the tenant needs to be able to move in and pay the deposit.

6. As more appliances are installed, the more important is the monthly inspection and this is where good tenancy relationships can blossom.

7. To install 5000 pounds worth of solar panels on the roof will earn an extra 700 pounds per year in energy and subsidy from the government for the next 20 years. As global warming causes the cost of energy to double, the value of solar panels will double.

A4. Facts:

1. Buy a new one bedroom apartment in Newcastle for 42000 pounds and earn 350 per month rental as 4200 pounds per year.

1. Buy a one bedroom apartment in Bradford for 39999 pounds and earn 375 per month rental as 4500 pounds per year.

1. Buy a semi house in Ferryhill Durham for 59999 pounds and earn 425 per month rental as 5100 pounds per year.

1. Buy a new two bedroom apartment in Liverpool for 99000 pounds and earn 577 per month rental as 6900 pounds per year.

1. Buy a one bedroom apartment in Leeds for 69999 pounds and earn 540 per month rental as 6500 pounds per year.

1. Buy an apartment in Newquay for 135000 pounds and earn up to 2000 per month rental as 24000 pounds per year.

1. Buy a new two bedroom apartment in Warrington for 105000 pounds and earn 550 per month rental as 6600 pounds per year.

1. Buy an old four bedroom terraced house in Crawley for 280000 pounds and earn 1300 per month rental as 15000 pounds per year.

1. Buy an old 3 bedroom terrace house in Bolton for 70000 pounds and earn 525 per month rental as 6300 pounds per year (9%).

* Opinion: a large number of small apartments may be more stable that one large property, but one large property could be enough to live off.

* Opinion: some people will work for 40 years to make others rich and never enjoy the continual income for life from one of the above properties.

Document Control.

1. Document Title: Buy To Let.

2. Description: Buy To Let, policies and guidelines.

3. Keywords: Buy To Let, policies and guidelines.

4. Privacy: Shared with approved people for the benefit of humanity. This is not financial or legal advice.

5. Edition: 1.4.

6. Issued: 14 May 2019.