Many UK landlords now face paying two years tax liabilities during the next six months, creating a cashflow crisis after years of lightly-taxed income and gains.
However, Legal 4 Landlords would like to remind its readers that ignorance is no defence when HM Revenue & Customs (HMRC) demands its share.
Geoff Davies, a partner of UHY Hacker Young, explained: “Many buy-to-let landlords came into profit on their investments in the tax year that ended on April 5, 2011, after the interest rates they were paying were slashed during the recession. This means that landlords could have to pay as much as 24 months tax in a 6 month period. Tax for the 2010/11 tax year was due by January 31st 2012, along with half of the tax for the current tax year, while the remaining half of the tax for the 2011/12 tax year will fall due on July 31st 2012.”
Baffling though the rules may seem; the painful fact is that HMRC expects its share of the UK buy-to-let boom; no matter how inconvenient its timing may seem.
Thousands of landlords bought between 2005 and 2007, during the highest peak in the housing market. Many did so with mortgages which charged low initial rates. Most have now risen to higher variable rates, along with tougher demands for capital repayments by credit-crunched lenders and regulators.
In some cases landlords without Rent Guarantee insurance, to ensure regular cashflow, have been forced into selling all the properties in their portfolio, simply to meet their tax obligations.”
Some reluctant and accidental landlords incorrectly assume that capital repayments on their mortgages are tax deductible. In fact, only the interest component of a buy-to-let mortgage can be offset against tax.
Richard Mannion, national tax director at Smith & Williamson, accountants and investment managers said:“One of the basic rules of the self assessment system is that your provisional liability for a tax year is based on the final liability of the previous year and this provisional liability is paid in two equal payments on account on January 31st and July 31st. This means that if your total taxable income increases you will have to settle the extra tax on January 31st following the end of the tax year, and on the same day you will have to pay 50% of that extra tax as part of the payment on account for the next tax year.”
However, it is possible to over-ride the automatic system and ask for the payments on account to be reduced if the total taxable income in any year is expected to be less than it was in the previous year.
Another option for landlords faced with tax bills they do not have the cashflow to pay is to borrow the money and use interest they are charged to reduce their taxable profits. Just like buy-to-let mortgages, other loans and overdrafts arranged in relation to the rental business are an allowable tax expense.
This means that buy-to-let landlords can get tax relief on borrowings up to the cost of their property, or its market value when it was first let out. But it would be safer to set cash aside as rental income arises to pay tax bills in future.