The UK rental market continues to offer lucrative opportunities for landlords, with rental yields on the rise. This upward trend is driven by steady house prices, increasing demand for rental properties, and strategic investment choices by landlords. Here’s what you need to know about the current rental yield landscape in the UK and how you can make the most of it.
According to recent data from a Buy-to-Let mortgage specialist bank, rental yields have shown consistent growth over the past year: • September 2024 Average Yield: 6.72% • Last Quarter Average Yield: 6.69% • Year-on-Year Increase: From 6.48% to 6.72% This positive trajectory highlights the growing potential of the UK rental market.
Best Performing Property Types
Different property types yield varying returns, with some outperforming others significantly: • Houses in Multiple Occupations (HMOs): 8.34% average yield – the top performer. • Freehold Blocks: 6.66% average yield. • Flats: 6.02% average yield. • Terraced Houses: 5.94% average yield.
Key Takeaway While HMOs offer the highest returns, simpler property types like flats and terraced houses still deliver competitive yields, catering to different investor preferences and risk profiles.
Regional Rental Yield Trends
Rental yields also vary widely by location: • Top Regions for Yields: o North East and Cumbria: 8.02% o Wales: 7.95% • Lowest Yields: Greater London at 5.52%, primarily due to higher property prices relative to rental income.
Average Property Value and Rental Income
In Q3 2024, the average property value stood at £343,356, with an annual rental income of £23,076. This demonstrates that areas with lower property prices often yield higher returns, making location a critical factor in rental profitability.
What’s Driving Higher Rental Yields?
Several factors have contributed to the rise in rental yields: • Rising Rents: A limited supply of rental properties has driven up rental income. • Stable House Prices: Steady property values over the past 18 months have created favorable conditions for landlords. • Diversified Property Options: Both high-yield HMOs and traditional properties like flats and terraced houses continue to perform well.
Beyond Rental Yields: Other Profitability Factors
Rental yields are a crucial indicator but don’t paint the full picture of profitability. Landlords should also consider: • Property Financing: Mortgage rates and repayment terms can significantly impact net returns. • Capital Gains: Properties tend to appreciate over time, adding to overall profitability. • Value-Boosting Improvements: Renovations and upgrades can increase both rental income and property value.
Existing Properties vs. New Purchases Analysts suggest that existing properties often outperform new purchases in profitability, benefiting from accumulated equity and rising rents.
While the market presents opportunities, there are challenges to navigate: • Higher Financing Costs: Rising interest rates may impact Buy-to-Let investors. • Stricter Regulations: New compliance requirements could increase operational costs for landlords. Strategic planning and professional advice can help mitigate these challenges, ensuring sustained profitability.
Smart Investments in the Current Market
For landlords and investors exploring Buy-to-Let opportunities, strategic decision-making is key: • Focus on High-Yield Property Types: HMOs and properties in regions with lower purchase prices offer excellent returns. • Prioritize Locations with High Demand: Areas with strong rental demand and lower property costs yield better profitability. • Seek Expert Advice: Engaging with property tax advisors and accountants ensures compliance and maximizes returns.
Rising rental yields in the UK provide landlords with a golden opportunity to capitalize on the rental market. Whether you opt for high-yield HMOs or more traditional properties, careful investment planning and a focus on market trends can drive long-term success. With demand outpacing supply and rental yields climbing, the time is ripe for landlords to make calculated moves in the rental property market. However, navigating challenges like higher financing costs and regulatory changes requires proactive management. Need professional advice on Buy-to-Let investments, property tax, or compliance? click here for more
UK landlords have a reason to be happy. Rental yields in the country are rising, boosted by stable house prices and growing demand for rental homes. According to data from a Buy-to-Let mortgage specialist bank, the average rental yield was 6.72% in September 2024. This is slightly up from the 6.69% recorded in the last quarter and a considerable increase from the 6.48% recorded a year earlier.
Houses in Multiple Occupations (HMOs) stood at the top of the charts with an average yield of 8.34%. Freehold blocks followed with 6.66% while flats and terraced houses handed returns at 6.02% and 5.94%, respectively.
What’s Driving the Upward Trend?
Experts say rental yields have been soaring over the last 18 months. Though properties like HMOs tend to bring the highest returns, simpler options like flats and terraced houses can still produce good yields. The takeaway for landlords is that whether you choose HMOs or traditional properties, the rental market provides great opportunities for juicy returns.
Location-wise Rental Yield Data
Rental yields vary depending on location too. Landlords in the North of England, including the North East and Cumbria, earned the biggest average yield at 8.02%, with Wales close behind at 7.95%. Whereas Greater London had the lowest yields at 5.52% due to high property prices compared with rental income. In the third quarter, the average yield was based on a property value of £343,356 and an annual rental income of £23,076. This means areas with cheaper properties have better returns. For landlords, choosing the right location is important for maximising profits.
Though rental yields are important for landlords, they do not provide the full picture of profits. Analysts say existing properties tend to perform better than new purchases because they benefit from rising house prices and rental income over time.
Profitability also depends on other factors like how the property is financed, capital gains and any improvements made to boost its value. Since mid-2022, yields have been jumping thanks to rising rents caused by limited supply and steady house prices. And there are still good opportunities for smart investors in the rental market. With rental yields rising, landlords have a great chance to benefit from high demand and limited supply. However, higher financing costs and stricter regulations could affect profits, so careful planning can be helpful. For investors considering Buy-to-Let opportunities, choosing the right property type can assist them in making the most of rental investments even in tough times.
Running a business comes with numerous challenges, and navigating the complex world of taxes is undoubtedly one of them. Many business owners miss out on valuable tax-saving opportunities simply because they’re unaware of them. Below are ten tax strategies that can help you legally minimize your tax obligations and keep more of your hard-earned profit.
Extracting Money via Salary Efficiently
While it’s common for company owners to take a small salary and the rest as dividends, this isn’t always the most tax-efficient method. For the 2024/25 tax year in the UK, you might consider setting your annual salary at £12,570 instead of the lower £9,100. Although the higher salary incurs employer’s National Insurance contributions, the additional corporation tax relief you receive can outweigh this cost, resulting in overall tax savings. Key Takeaway: Opting for a salary of £12,570 can be more tax-efficient due to the corporation tax relief, despite the employer’s NI charge.
Dividends can be a tax-efficient way to extract profits from your company. For the 2024/2025 tax year, you can take dividends up to the basic rate threshold of £50,270, taxed at 8.75%. If you’re a couple and both are shareholders, you can potentially extract up to £100,540 in dividends without incurring higher dividend tax rates. Important Note: Ensure all dividend payments are properly documented with board minutes and dividend vouchers to comply with HMRC regulations and avoid reclassification as remuneration.
Running Your Car Tax-Effectively
Many business owners either own their car personally and charge mileage or have the company own the car, incurring a benefit-in-kind (BIK) tax charge. A more tax-efficient alternative is to run your car through a Limited Liability Partnership (LLP) or partnership. This method can offer substantial tax savings by allowing you to claim a significant portion of your car’s running costs against the partnership’s income. Caution: This strategy requires careful consideration and professional advice, as it may not suit all circumstances.
Utilizing Family Tax Allowances
Every individual in the UK has a personal allowance of £12,570, regardless of age. By involving your spouse and children in your business structure, you can distribute income and take advantage of multiple personal allowances. Setting up a discretionary trust for your minor children allows you to allocate dividends to the trust, which can then be used for their expenses, effectively utilizing their personal allowances. Benefit: This strategy can save significant amounts in taxes while providing for your children’s needs.
Leveraging R&D Tax Credits
Research and Development (R&D) Tax Credits are underutilized by many businesses. If your company works on innovative projects that involve overcoming technological uncertainties, you may qualify. SMEs can claim an additional 86% deduction on qualifying R&D costs, leading to substantial tax savings. Action Point: Review your business activities to identify potential R&D projects and consult with a tax professional to maximize your claim.
Property and Pensions through SSAS
Using a Small Self-Administered Scheme (SSAS) to hold commercial property can offer significant tax benefits. Contributions to a SSAS are tax-deductible, rental income is tax-free, and capital gains within the SSAS are not taxed. This strategy also protects the property from corporate risks associated with holding it within your trading company. Recommendation: Consider transferring your commercial property into a SSAS to benefit from tax relief and asset protection.
Inheritance Tax (IHT) and Trust Planning
Inheritance Tax can significantly reduce the wealth passed on to your beneficiaries. Utilizing discretionary trusts allows you to transfer assets out of your estate, reducing its value for IHT purposes while retaining control over the assets. You can transfer up to £325,000 into a trust every seven years without incurring IHT. Strategy: Begin IHT planning early to maximize the use of trusts and reduce potential tax liabilities for your estate.
Married couples and civil partners can transfer assets between themselves without incurring Capital Gains Tax, allowing for strategic tax planning. By adjusting the ownership of income-generating assets, you can utilize both personal allowances and lower tax brackets, reducing the overall tax burden. Example: Transferring rental property ownership to a lower-income spouse can result in rental income being taxed at a lower rate.
Preparing for a Tax-Efficient Business Sale
If you’re planning to sell your business, ensure you qualify for Business Asset Disposal Relief (BADR), which reduces the CGT rate to 10% on qualifying gains. Review your shareholding structure, and consider transferring at least 5% of shares to your spouse if they are involved in the business, to maximize the relief available. Note: Non-trading assets can jeopardize your company’s trading status for BADR purposes. Address this well before the sale.
Share Buybacks and Share Options
For those not ready to sell to a third party but wanting to step back, a company share buyback can be an effective exit strategy, taxed at the favorable BADR rate. Additionally, implementing an Enterprise Management Incentive (EMI) scheme allows you to offer tax-efficient share options to key employees, aligning their interests with the company’s success. Advice: Use share buybacks and EMI schemes to facilitate succession planning and incentivize key staff without losing control of your business.
These ten strategies highlight the importance of proactive tax planning in maximizing your wealth and the efficiency of your business operations. Each strategy requires careful consideration and should be tailored to your specific circumstances. It’s crucial to consult with a qualified tax professional to ensure compliance with tax laws and to fully leverage the benefits available to you.
According to statistics, 20% to 25% of small businesses fail within their first year. Approximately 50% of small businesses fail within their first five years and by the end of the first decade, roughly 70% to 80% of small businesses will have closed their doors permanently. This statistic also holds for property related businesses.
Investing in property can be a lucrative venture, but it also comes with its own set of challenges. From understanding complex tax laws to ensuring compliance with regulatory requirements, the tax landscape for landlords and property investors can be daunting.
In my years of assisting landlords and property investors, I’ve observed a common thread: certain mistakes that property investors make that can have serious consequences for investment viability and profitability. Whether it’s overlooking important tax deductions, failing to account for capital gains tax, or misunderstanding the implications of recent tax reforms, these errors can lead to unnecessary tax liabilities, penalties, and financial setbacks.
A deep understanding of what it takes to run a business is often lacking. Whilst many property investors understand the need to generate revenue and be profitable is indispensable, there is often lack of clarity around the full extents of expenses that can be claimed and the taxes that would need to be paid.
You may have an accountant that does your tax returns once a year, but they aren’t aware of what’s going on in your world day-to-day.
This may inadvertently lead to you missing key deadlines and falling foul of HMRC tax obligations, resulting in significant fines and penalties.
You could be the subject of an investigation by HMRC, and worst-case scenario, you might end up in jail.
Unless you’ve run a business before, you wouldn’t know what you need to do when it comes to meeting your accounts and tax obligations.
And if you don’t have an accountant (or only have one that speaks to you once a year) then no one will have advised you on what to do in this situation.
This essential guide is for landlords and property investors, whether established or just starting up in business.
Whether you’re a seasoned property investor or a novice landlord just starting out, this book is designed to empower you with the knowledge and insights you need to make informed decisions and minimize tax-related risks in your property investment journey.
This book explores the seven big mistakes that landlords and property investors make when it comes to tax—and, more importantly, how you can avoid them to build a successful and sustainable property portfolio in the UK.
This guide will identify the 7 big mistakes that property investors like you (inadvertently) make and how to avoid them.
I hope this helps to make you more aware of the pitfalls out there and alerts you to take action if you haven’t already.
And of course, if you’d like a chat to see how we can take away the pain of managing your accounts and taxes, so you get to keep more of what you earn and can focus on building your following, then simply click on the link below to book a call!
All the best,
Felix – Specialist Property Accountant
7 Big Mistakes Landlords and Property Investors Make When Starting up (and how to avoid them!)
Mistake 1:
Not treating it as a business from the beginning. Whether you’re just starting out and in the process of buying your first property or already building your portfolio, it’s essential to recognize that you’ve transitioned from a hobbyist to a business owner. You are now running a business!
Running a business imposes some immediate obligations which must be met within set timelines, particularly concerning taxes.
In the United Kingdom, new businesses have several tax obligations that need to be fulfilled.
1 Corporation Tax If your business operates as a limited company, you’ll be subject to corporation tax on your profits. You need to register your company with HM Revenue & Customs (HMRC) within three months of starting your business.
2 Self-Assessment If you will be running your business in your own personal name (see mistake #2 below), you will need to be registered as a self-employed. If self-employed or a partner in a partnership, you’ll need to complete a self-assessment tax return each year to report your income and expenses. This includes any income from your business activities, as well as other sources of income such as investments or rental properties.
3 Stamp Duty Land Tax (SDLT) SDLT is a tax paid on property purchases in England and Northern Ireland. The amount of SDLT payable depends on the purchase price of the property and whether it is residential or non-residential.
4 Value Added Tax (VAT) If your business’s taxable turnover exceeds the VAT threshold (currently £85,000 as of 2024), you must register for VAT with HMRC. VAT is a consumption tax levied on the value added to goods and services, and you’ll need to charge VAT on your sales and submit VAT returns to HMRC regularly.
Property investors have a range of VAT rates applicable in their businesses (Standard rate – 20%, Reduced rate – 5%, Zero rate and Exempt).
Serviced accommodation is taxable supply, and 20% VAT is charged. If your business sells more than VAT registration threshold, you must register for VAT.
5 PAYE (Pay As You Earn) If you employ staff, you’ll need to operate a PAYE scheme to deduct income tax and National Insurance contributions from their salaries. You’ll also need to make employer’s National Insurance contributions.
6 National Insurance Contributions (NICs) As a self-employed individual or director of a limited company, you’ll be responsible for paying Class 2 and Class 4 NICs on your profits or earnings. Employees are also required to pay NICs
7 Business Rates If you operate from business premises, you may be liable for business rates, which are a tax on non-domestic properties. The amount you pay depends on the rateable value of your premises and the applicable multiplier set by the government.
8 Inheritance Tax (IHT) Inheritance tax may be payable on the value of a property when it is transferred upon death, depending on the total value of the deceased person’s estate and any available exemptions or reliefs.
9 Capital Gains Tax (CGT) CGT may be payable when selling a property that has increased in value since its purchase. Property investors are required to report any capital gains on property sales and pay CGT on the profits, after deducting any allowable expenses and applying reliefs or exemptions.
It is important to stay informed about your tax obligations and ensure compliance with HMRC regulations. Seeking advice from a qualified property accountant or tax advisor can help you understand your tax obligations and manage your tax affairs effectively.
Ignoring your tax obligations is not an option. HMRC utilizes sophisticated technology to track income generated by landlords and property investors. Failing to report your earnings accurately could lead to severe consequences, including hefty fines and penalties.
Take proactive steps to ensure compliance with tax laws and regulations. If you’re unsure about your tax obligations or need assistance, schedule a call with us to go through your requirements.
Remember, staying on top of your taxes is crucial as your business grows and evolves.
If you haven’t done any of the above, you might be falling foul of the tax obligations here and you could be subject to penalties and interest equal to 100% of the tax you owe if HMRC gets to you first.
Action Point: Make sure you are running your property business under a formal structure, understand compliance requirements associated with that structure and be sure to record and retain records compliantly.
Mistake #2:
Not having the most tax-efficient structure. As you navigate the realm of entrepreneurship, one crucial aspect to consider is selecting the most tax-efficient business structure.
In this chapter, we’ll explore the differences between being a sole trader and operating through a limited company, focusing on how each structure impacts your tax obligations and overall financial strategy.
So, assuming you have at least registered for self-assessment with HMRC, you’ll be classed as a ‘sole trader’.
That is one form of business structure that is typically used by many small business owner-operators who run small businesses typically on their own, such as plumbers, electricians, etc. (although this trend is fast changing since the introduction of Section 24 tax (see below))
Being a sole trader is fine if you expect your earnings to be modest and not exceed the basic rate tax bands (currently £50,270 per year).
However, if you are exceeding that figure already (or hope to) then an alternative business structure may be more beneficial for you. The most common structure is a limited company.
A limited company is a separate legal entity from yourself. This means that it has its own ‘tax status’ and is required to submit accounts and pay taxes in its own right.
When you set up a limited company you are the shareholder of the company which means that the assets of the company belong to you.
You are also the director of the company meaning that you are responsible for managing the company and ensuring that the company meets its statutory responsibilities such as filing accounts, submitting tax returns, paying VAT, etc.
Below are some factors to consider when choosing between the two most common business structures.
Sole Trader
Suitable for small business owner-operators, such as plumbers, electricians Simple setup with minimal administrative requirements Taxed on the profits made in a tax year, subject to income tax rates. Basic rate tax bands apply, currently up to £50,270 per year. Considered advantageous for modest earnings but may not be optimal for higher income levels.
Limited Company
Offers a separate legal entity from the owner(s) with its own tax status. Requires submission of accounts and payment of taxes by the company. Owners are shareholders and directors, responsible for managing the company and meeting statutory obligations. Company profits are taxed at the corporation tax rate, starting at 19%. Owners can access profits through dividends or salary, with different tax implications.
The biggest difference – aside from the legal status – between a sole trader and a limited company is the way that the two are taxed.
When you’re a sole trader you are taxed on the profit you make in a given tax year (between April to April).
If you have your own company, the company is taxed on the profits of its financial year (which will depend on when it was incorporated (set up).
The profit then stays in the company and if you want access to it, you have to take it as a dividend on salary.
The main reason people use limited companies for tax purposes is that companies pay a lower rate of corporation tax which is currently 19% (rising to 25%) whereas sole traders can pay up to 45% on profits.
Section 24 of the Finance Act 2015 introduced changes to the tax treatment of finance costs (such as mortgage interest) for individual landlords. Under this provision, finance costs are no longer fully deductible against rental income when calculating taxable profits. Instead, landlords can only claim a basic rate tax reduction on their finance costs.
Limited companies, on the other hand, are typically not affected by Section 24 in the same way because their finance costs are generally treated differently for tax purposes. Interest payments on mortgages or loans used to finance property acquisitions or improvements are typically considered allowable expenses and are fully deductible when calculating taxable profits for limited companies.
But there is more to tax when it comes to operating through a limited company.
Because you have to take money out of the company to get access to it, you are subject to income tax on what you receive which will depend on whether you take it as a salary or dividend.
There is an optimum way to make money from your company which is to take a small salary of around £1,048 and then the balance by dividends.
The amount of tax on the dividends you take depends on how much you withdraw.
The table below shows the tax rates that apply on dividends.
Threshold
£0 -£12,570
£12,571 – £50,270
£50,271 – £150,000
Over £150,000
Dividend Tax 2023/24
0%
8.75%
33.75 %
39.35 %
If you have more than one shareholder in the company, say a spouse or partner, then you can share the number of profits you take out to keep your overall taxes lower.
Other Benefits of Having a Company
Professional Image
When you have a company, there is an element of ‘prestige’ attached.
Operating as a company can enhance your business’s credibility and professional image. Many clients, customers, and partners prefer to work with businesses that are structured as legal entities rather than sole proprietorships or partnerships. Having “Ltd or Limited” in your business name can convey stability and seriousness to stakeholders. This might help you when you are trying to secure sponsorship deals because there is a perception that you are a proper business.
Access to Capital
Operating as a limited company may enhance your ability to attract investment capital. Investors may feel more comfortable investing in a structured entity that offers limited liability protection and clear governance structures. Additionally, forming a limited company can open up opportunities to secure business loans and lines of credit from financial institutions.
Separate Legal Entity
By running your business through a company, there is a ‘corporate wrapper’ around you. What that means is that your assets are not at risk if someone takes action against the company.
Say, for example, there is a big debt accumulated in the company which the company can no longer pay, and a debt demand is issued. As long as you haven’t given a personal guarantee then they cannot go after you. This wouldn’t be the case if you were trading as a sole trader.
Action Point: Get advice on the most suitable entity you should set up and how much it could save you in tax. It’s important to do this at the very beginning rather than later to avoid racking up a big personal tax bill.
Mistake #3:
Underestimating the Role of Your Accountant. Do you only see/speak to your accountant once a year. Only talking to your accountant once a year is not a great idea.
If you’ve been trading for a little while you probably have an accountant that does your tax returns.
He/she asks for your information once a year which you dutifully provide, and they provide you with details in turn of how to pay the tax you owe.
If your accountant hasn’t got you set up as a proper business and monitoring your finances every month, then they won’t know about important changes that may impact your accounts and tax affairs until much later down the line.
The income you were earning a year ago might be a lot less than what you’re earning now (or vice versa). This means you could be exposed to potential penalties and fines.
Worse still, if HMRC finds out before you tell them, then they can get pretty nasty with the action they take against you!
A proactive accountant should be closer to the details as it relates to your income and expenses and should be managing your finances on a real-time basis.
There are so many things that you need to think about which you probably have no idea about – and no reason why you should because you’re not an accountant or tax expert!
Things such as: Treatment of revenue versus capital expenditure What you can claim as expenses against your profits. What records you need to keep. Tax efficient ways of extracting money out of your business
Consider using an app or simple software that captures your income and expenses on the go, ensuring your finances are kept up to date. Cloud based software such as FreeAgent, Quickbooks or Xero are good examples.
This will enable you (and your accountant) to track your income, your expenses and account for all the taxes you are legally obliged to.
With the tech available these days, you can have apps set up on your phone that allow you to quickly take a photo of receipts and send them straight to your account’s software for your accountant to process.
This means you don’t have to store invoices and receipts anywhere physically as they get captured in the software so you can throw away the originals. It also means you get to claim tax back on the expenses and have the records available to HMRC should they ask for them.
Action Point: Your accountant is indispensable for the success of your journey and should be a key member of your `power team’. They need to get more involved and should be consulted for key financial decisions and timely advice can go a long way to saving you thousands of pounds down the line. Consider switching accountants if this level of service cannot be provided by your current accountant.
Mistake #4:
Being on the HMRC’s Watchlist list! Avoiding being on the Taxman’s Radar and staying Off HMRC’s Watchlist must be your target.
When it comes to keeping the Tax Man off your back, it’s crucial to understand the distinction between tax evasion and tax avoidance. The former is illegal, and you can go to jail for it. The latter is perfectly legal and what good accountants help their clients do.
Tax evasion involves deliberately underreporting income or concealing assets to avoid paying taxes, and it’s a serious criminal offense that can land you in jail.
You might wonder if the authorities could realistically catch you in the act. The answer is yes, and they have some powerful tools at their disposal. HMRC employs advanced technology, including sophisticated algorithms and data analysis, to detect anomalies in financial records and identify individuals who may be evading taxes.
There’s often a fine line between smart tax planning and, well, getting on the wrong side of the Tax Man.
HMRC tends to run campaigns targeting specific traders including landlords from time to time.
Receiving a letter from HMRC demanding an explanation for undeclared income is a scenario you definitely want to avoid. The consequences of tax evasion can be severe, both financially and legally.
They have crazy powers to take action on people who evade tax.
If you’re not comfortable managing your taxes and accounts, get a good property accountant.
I don’t want to scare you too much (although I probably already have – sorry!) but this is serious stuff – and it’s easy to get right – just get a good accountant in your corner to make sure you’re always compliant and that’ll keep the Tax Man at bay.
Action Point: Don’t take chances with the Tax Man. Stay on the right side of the law by accurately reporting your income, disclosing all relevant financial information, and seeking professional guidance when needed. Penalties and fines that can be imposed in some instances can be up to double the original tax liability.
Mistake #5:
Not claiming all the expenses, you can. Leaving money on the table by failing to maximize expense claims is a common mistake we frequently find when we take on new landlords and property investors as clients.
The popular expression: “It’s not what you earn those matters, it’s what you keep”, is so true.
What it means is that you need to pay attention to what you can take from your business yourself after all taxes have been settled.
Given the complexity of the tax legislation in the UK, there are huge differences in what you can take home depending on the advice you receive about what you can and can’t claim.
Put simply, the more expenses you can deduct, the less profit you have to report – and the less tax you’ll owe.
So, what expenses can you claim? Generally, any cost that’s “wholly and exclusively for the benefit of your property business can be deducted.” Here are some examples.
Mileage costs for driving around to view properties before an offer is made. Payments to your trusty handyman for property repairs Subscriptions to those sweet property management apps / magazines Your dedicated phone line for dealing with tenant emergencies. Fees paid to your rockstar accountant (worth their weight in gold) Those road trips to check on your properties. Getting your mobile phone costs reimbursed by your rental business (because business calls never stop)
There are some things that you cannot claim because they have a dual purpose such as clothes you wear and food you eat.
Because there are so many anomalies, it’s important to have a system to capture all the expenses you are incurring and for someone to categorize them as soon as they are incurred so you don’t miss out.
There are some additional expenses you can claim which are not always proactively advised by accountants which include:
Claiming 45p a mile for use of your car for business purposes (you can charge this to your company and receive it tax-free). Charging your company rent for using part of your home as an office. Claiming back your mobile phone costs.
Action Point: Meticulous tracking of business income and expenses is vital for accurate accounting and tax compliance. Missed expenses can be very costly as more expenses reduces profit and taxes. Overall, maintaining thorough records also empowers you to make informed decisions.
Get in touch and find out more – www.felixaccountants.com 19 7 Big Mistakes Landlords and Property Investors Make When Starting up (and how to avoid them!)
Mistake #6:
Trying to do everything yourself. When you start any new venture, you tend do everything yourself. Perhaps you are bootstrapping, and finances are tight.
From registering the company, creating the website, marketing the business and looking after the finances of the company.
As you grow, so does the demands of the business.
Now, this chapter isn’t anything to do with accounts and tax, but about making that move from working IN your business to working ON your business.
And most importantly, seeing what you do as a business and not merely just you, the person.
As the demands on your time increase, it becomes important to build good systems.
All the most successful businesses and entrepreneurs build systems in their business so they can run without them.
We all have tasks we can be doing which will earn us different notional amounts, say £10, £100 and £1000 an hour task.
What you need to be focusing on are the £1000 an hour task.
This means delegating out all the tasks you currently do which someone else could do at a lower hourly rate.
This could include: Sourcing new property deals Initial due diligence on leads Social media marketing Bookkeeping
There are lots of freelancers you can find on sites such as People Per Hour, Fiverr, or Upwork that can help you out with these things at a competitive cost.
But before you do that, think about what you can document first to make it easy for whoever you delegate work to, do it to your standard.
That is the key to building systems and processes that can streamline your business.
Action Point: Start to document processes of your business so you can begin to delegate out tasks that you don’t need to do and free up your time for higher value activities.
Mistake #7:
Poor record keeping. Accurate and complete record-keeping is the cornerstone of sound financial management for any business, including your property investments. Mistakes in this area can be very costly and can lead to compliance issues and missed opportunities.
Poor record-keeping can have significant consequences for property investors and landlords as you will often have lots of expenses and deadlines, both financial and non-financial to deal with. For example, insurance renewal dates, gas safety certificate renewals, end dates for fixed term mortgages etc.
Without accurate and organized financial records, it becomes challenging to track income, expenses, and profits effectively. This can lead to:
Compliance issues: Inadequate record-keeping may result in errors or omissions in financial reporting, potentially leading to compliance issues with HMRC. Failure to maintain proper records can result in penalties, fines, and legal disputes in the event of an inquiry into your business affairs by HMRC in the future.
Missed expenses: Without meticulous record-keeping, property investors may overlook eligible expenses and deductions, resulting in higher tax liabilities than necessary. Missed opportunities to claim allowable expenses means more profit and more profit means more taxes, negatively impacting your cashflow.
Paralysed decision making: Poor record-keeping hampers the ability to make timely and informed financial decisions. Without accurate financial data, investors may struggle to assess the performance of their property portfolio at any one time, identify areas for improvement, or capitalize on growth opportunities.
Tracking repairs and refurbishments costs. Properties require ongoing maintenance, repairs, and occasional refurbishments to ensure tenant satisfaction and preserve asset value. Inadequate record-keeping makes it challenging to track maintenance history, monitor repair expenses, and budget for future refurbishments.
The following strategies can help you improve the quality of your record keeping;
Consider using software / apps where possible. For example, a bookkeeping software such as Xero or QuickBooks will enable you to track your income and expenses and can generate reports that will be useful for your accountant in preparing your financial statements.
Regular reconciliation: Reconcile bank statements, rental income, and expenses regularly to identify discrepancies and ensure the accuracy of financial records. Timely reconciliation helps detect errors and address them promptly.
Invest in systems. Managing rental income and expenses across multiple properties becomes cumbersome without centralized record-keeping systems. Investors risk overlooking rental payments, failing to track expenses, and inaccurately assessing property-level profitability. There are several systems available in the market e.g. Lendlord that will come in handy here.
Maintain supporting documentation: Keep organized records of receipts, invoices, contracts, and other financial documents to support transactions recorded in the accounting system.
Take professional advice: Engage qualified accountants or financial advisors with expertise in property investment to provide guidance on record-keeping best practices, tax planning strategies, and compliance requirements.
Action point Maintaining accurate and comprehensive financial records is essential for effectively managing the diverse financial aspects of a property portfolio, from rental income and expenses to insurance renewals and mortgage obligations. By implementing tailored record-keeping strategies and leveraging technology and professional support, property investors can navigate the complexities of financial management with confidence and optimize the performance of their diverse property investments. Make such to track all expenses related to your business and separate personal expenses from business related expenses.
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A recent report from the government’s English Housing Survey has unveiled surprising insights into England’s private rental market. Contrary to popular belief, a significant majority—71%—of private renters report no trouble paying their rent. This data challenges the narrative questioning the affordability of rent in the private sector.
The State of the Private Rental Market
The survey, published by the Ministry of Housing, Communities and Local Government, sheds light on the experiences of the 4.6 million households renting from private landlords in England. Notably, only 5% of these households are behind on their rent payments, indicating a relatively stable financial situation for most tenants.
Financial Stability Among Renters
Private renters typically spend about a third of their income on rent. While this is higher than the 18% spent by homeowners with mortgages, it is comparable to the 26% spent by social housing tenants. The higher percentage reflects the flexibility and lower long-term commitment associated with renting. Moreover, renters enjoy greater mobility compared to homeowners—a benefit often overlooked in discussions favoring homeownership.
Longevity in Tenancies
The notion that private renting is inherently unstable is also challenged by the survey’s findings. Tenants stay in the same home for an average of 4.3 years, suggesting that the sector offers more stability than commonly perceived. Longer tenancies can lead to better community integration and provide a sense of security for families and individuals alike.
Are No-Fault Evictions a Concern?
Despite widespread concerns over “no-fault” evictions, the survey reveals that only 9% of renters who moved in the last three years were evicted or asked to leave. In most cases, landlords had practical reasons for ending tenancies, such as selling or repurposing the property, rather than issues with the tenants themselves.
Understanding Section 21 Notices
The use of Section 21 notices, which allow landlords to evict tenants without providing a reason, has been a contentious issue. However, the survey indicates that the fear of arbitrary evictions may be overstated. The government has proposed reforms to abolish Section 21 evictions, aiming to provide greater security for tenants while balancing the rights of landlords.
The Issue of Housing Quality
While financial stability appears strong among renters, housing quality remains a significant concern. Approximately 21% of private rental properties fail to meet the Decent Homes Standard—a marginal improvement from 23% in 2019 but still notably higher than the 14% for owner-occupied homes and 10% for social housing.
The Decent Homes Standard Explained
The Decent Homes Standard sets the minimum criteria that properties should meet to be considered habitable. These include factors like structural integrity, effective heating systems, and absence of health hazards. The fact that over a fifth of private rentals do not meet these standards raises questions about the living conditions that tenants are paying for.
Impact on Tenants’ Well-being
Poor housing conditions can have adverse effects on tenants’ physical and mental health. Issues such as dampness, inadequate heating, and structural problems not only affect comfort but can lead to serious health complications. This underlines the importance of enforcing housing standards to ensure safe living environments.
Regional Variations in Rental Experiences The survey also highlights regional differences in the rental market. Urban areas, particularly London, tend to have higher rents and a larger proportion of income spent on housing. Despite higher costs, tenants in these areas may still report financial stability due to higher average incomes.
The North-South Divide
In contrast, tenants in northern regions may spend a smaller percentage of their income on rent but could experience lower housing quality. This variation underscores the complexity of the rental market across England and the need for region-specific policies.
Moving Towards Better Standards
Change may be on the horizon. There’s growing momentum to extend the Decent Homes Standard to private rentals, which could compel landlords to improve their properties. The government has been considering measures to enforce higher standards, including stricter regulations and penalties for non-compliance.
Landlords’ Responsibilities
Landlords play a crucial role in maintaining housing quality. By investing in property improvements, they not only comply with regulations but also enhance the value of their assets. Improved living conditions can lead to longer tenancies and reduce turnover, benefiting both landlords and tenants.
Potential Market Implications
Tightening standards may lead some landlords to exit the market due to the increased costs of compliance. While this could reduce the number of available rental properties, it may also drive out less scrupulous landlords, leading to an overall improvement in housing quality.
The Role of Policy and Legislation
Government policies significantly impact the rental market. Recent initiatives aim to balance tenant protections with landlords’ rights, fostering a fair and sustainable housing sector. Proposed Reforms
• Abolishing Section 21 Evictions: Enhancing tenant security by requiring landlords to provide valid reasons for eviction. • Introducing a Renters’ Reform Bill: Streamlining dispute resolutions and ensuring fair practices. • Energy Efficiency Standards: Mandating improvements to reduce environmental impact and lower utility costs for tenants.
The English Housing Survey offers a nuanced view of England’s private rental market. While most tenants manage their rent payments without difficulty and enjoy stability in their housing, the quality of rental properties remains a pressing issue. Addressing housing quality is crucial. If proposed changes to enforce higher standards take effect, renters could finally receive better value for the prices they are paying, leading to a more equitable and satisfactory rental experience.
After years of turbulence, the UK housing market is showing signs of resilience. Declining mortgage rates and renewed political stability have contributed to a rebound in house prices. But with memories of recent market volatility still fresh, many are asking: Do we need to worry about a UK housing market crash? This article delves into the current state of the property market and explores whether such concerns are warranted.
The Mini Budget 2022 and Its Aftermath
The Mini Budget of 2022 marked the beginning of a chaotic period for the UK housing market. House prices had soared to record highs that summer, but the budget’s aftermath saw them crumble as mortgage rates skyrocketed. Buyers retreated, lenders tightened their belts, and inflation eroded the value of savings. By mid-2023, mortgage rates spiked again, fueling fears of a prolonged housing slump. The Bank of England’s aggressive interest rate hikes to combat inflation added to the market’s uncertainty.
Renewed Optimism: Rate Cuts and Government Initiatives
Relief finally arrived with the Bank of England’s rate cuts in August and November 2024, making mortgage rates more affordable. The new government further boosted investor confidence by introducing policies aimed at rejuvenating the housing market. Ambitious housebuilding targets and the “Freedom to Buy” scheme for first-time buyers have injected fresh energy into the property sector.
What Is the Current Situation of the UK Property Market?
To grasp the present state of the UK housing market, examining sold house prices offers valuable insights. Recent data shows that October’s average house prices have eclipsed the pandemic peak, posting the fastest annual growth since late 2022. However, uncertainty ahead of the Autumn Budget has tempered this momentum. Annual price growth slowed from 3.2% in September to 2.4% in October as buyers paused before the budget announcement.
Despite this slowdown, the outlook is not gloomy. Real estate agencies report that property sales are on track to hit a four-year high, setting the stage for a reinvigorated housing market.
While sold prices reflect decisions made months prior, asking prices provide a more immediate snapshot of the market. In October, asking prices rose by 0.3%, below the typical 1.3% hike expected for the month. This indicates a slow but steady progress. Other indicators suggest brighter days ahead. Data from the Royal Institution of Chartered Surveyors (RICS) points to growing optimism among estate agents. In September, more agents reported expectations of rising house prices as market activity picked up and both buyers and sellers returned.
Is a Housing Market Crash on the Horizon?
Forecasting the future of UK house prices is inherently challenging due to numerous influencing factors. However, the general outlook appears positive. Falling swap rates suggest that financial markets are already pricing in further rate cuts. Major players in real estate remain optimistic, with analysts predicting a 2% to 2.5% rise in average house prices next year.
Based on current indicators, concerns about a UK housing market crash seem unwarranted. The combination of falling mortgage rates, government initiatives, and renewed market confidence points toward continued growth. While investors should remain vigilant, trends suggest that house prices will rise and the property market will continue to thrive.
UK Property Accountants is a leading firm of chartered certified accountants and chartered tax advisers specializing in the property and real estate sector, headquartered in Central London. For expert advice and guidance on UK property matters, feel free to contact us.
The UK property market is experiencing a remarkable transformation following the announcement of the 2024 Autumn Budget. Homeowners and property investors have reacted decisively, fueling a notable increase in property listings that signals a new wave of activity in the housing sector.
The Post-Budget Property Listing Boom
In the two weeks following Chancellor Rachel Reeves’ Autumn Budget, the UK property market witnessed an 11.4% surge in listings. This remarkable growth added 84,000 homes to the market, bringing the total number of available properties to an impressive 823,898. This surge highlights a significant shift in seller behavior, likely driven by policy uncertainties and impending tax changes outlined in the budget.
Regional Highlights: Where Listings are Soaring
The rise in property listings wasn’t uniform across the UK. Certain regions and cities emerged as clear leaders: • Scotland recorded the largest increase, with property listings jumping by an extraordinary 12.7%. • The North East and London followed closely, showing strong gains. • Even Wales saw a solid 9.5% rise, reflecting widespread enthusiasm. At the city level: • Glasgow topped the charts, with listings climbing an impressive 13.4%. • Nottingham, Edinburgh, and Brighton also posted significant increases, underscoring broad momentum across urban markets.
What’s Driving the Post-Budget Listing Spike?
The dramatic increase in listings can be attributed to a combination of market dynamics and government policies. • Budget Expectations and Disappointment: Many sellers had postponed their listing plans, waiting for potential tax breaks or incentives in the Autumn Budget. However, Chancellor Reeves’ budget fell short of offering any significant relief for homeowners, particularly failing to extend the current Stamp Duty relief. This lack of incentives prompted a wave of sellers to act swiftly, capitalizing on the current tax framework before it changes.
• Stamp Duty Deadline Pressure: The Stamp Duty relief is set to end on 31 March 2025, creating urgency among both buyers and sellers. Homeowners are eager to list properties before potential buyers face higher taxes, while buyers are equally motivated to secure deals under the current rates.
Buyers Joining the Rush
The seller surge has been matched by heightened buyer activity. Data from a major real estate agency chain revealed a 71% increase in property sales in October compared to September. This surge indicates a race among buyers to finalize purchases before Stamp Duty rates rise from 3% to 5%. Interestingly, despite the sharp rise in sales during October, new listings dropped by 24% earlier in the month as sellers hesitated in anticipation of the budget announcement. The subsequent rush post-budget suggests that both buyers and sellers are racing against the clock to benefit from the existing tax relief.
Outlook for the UK Housing Market
The Autumn Budget has undeniably shaken the UK property market. The combination of uncertain policies, tax deadlines, and economic pressures has set the stage for a dynamic few months ahead.
• For Buyers: The pressure to close deals quickly before March 2025 could sustain demand in the short term. However, rising taxes and economic uncertainty may dampen enthusiasm in the medium term. • For Sellers: The post-budget listing surge may represent an attempt to capitalize on current conditions before the market stabilizes or shifts. The coming months will determine whether the current momentum can be sustained or if the market will experience a cooldown as tax deadlines approach and economic factors evolve.
Navigating a Changing Market The 2024 Autumn Budget has ignited a flurry of activity in the UK property market, with sellers flooding the market and buyers scrambling to lock in deals under favorable tax conditions. While the immediate effects are clear, the long-term implications remain uncertain. For property investors, homeowners, and buyers alike, the key to navigating these changes lies in staying informed and acting strategically. As the housing market adjusts to the realities of the Autumn Budget, it remains a space to watch closely in the months ahead.
Investing in property through a limited company, often referred to as a Special Purpose Vehicle (SPV), can offer significant tax advantages compared to personal ownership. This approach has become increasingly popular among property investors seeking to optimize their tax liabilities and enhance their investment returns. Below, we explore five key ways an SPV can help you save on taxes, along with considerations to keep in mind.
Individuals pay Income Tax on rental income at rates up to 45% for additional-rate taxpayers. In contrast, limited companies are subject to Corporation Tax on profits, which is currently 19% for profits up to £50,000 and 25% for profits over £250,000. This difference can result in substantial tax savings, especially for higher-rate taxpayers.
Example: Consider a property generating an annual rental income of £20,000, with allowable expenses of £5,000, resulting in a net profit of £15,000. • Personal Ownership: As a higher-rate taxpayer (40%), you would pay £6,000 in Income Tax, leaving you with £9,000 after tax. • Company Ownership: The company pays 19% Corporation Tax on £15,000, amounting to £2,850, leaving £12,150 in the company. In this scenario, owning the property through a company results in £3,150 more retained profit compared to personal ownership.
Full Deduction of Mortgage Interest
Limited companies can fully deduct mortgage interest from rental income before calculating taxable profits. Individuals, however, are restricted by Section 24 regulations, which allow only a 20% tax credit on mortgage interest. This full deduction can significantly reduce the taxable profit for companies, leading to lower tax liabilities.
Example: Assume a property with an annual rental income of £20,000 and mortgage interest payments of £8,000. • Personal Ownership: Only a 20% tax credit on the £8,000 interest (£1,600) is available, reducing the tax liability slightly. • Company Ownership: The full £8,000 interest is deductible, reducing taxable profit to £12,000, leading to a lower Corporation Tax bill. This ability to fully deduct mortgage interest can make a significant difference in the overall profitability of your investment.
Retaining Profits for Reinvestment
Retaining profits within a company allows for reinvestment into additional properties without immediate personal tax liabilities. This approach enables faster growth of your property portfolio, as profits are taxed at the lower Corporation Tax rate and can be reinvested without further tax implications until dividends are paid out.
Example: If your company retains £12,150 after tax annually, over five years, you would accumulate £60,750. This amount could be used as a deposit for purchasing additional properties, thereby expanding your portfolio more rapidly than if profits were withdrawn and subjected to higher personal tax rates.
Tax-Efficient Dividend Payments
When extracting profits from a company, dividends are taxed at rates lower than Income Tax. For the 2024/25 tax year, the dividend tax rates are 8.75% for basic-rate taxpayers, 33.75% for higher-rate taxpayers, and 39.35% for additional-rate taxpayers. Additionally, there’s a £1,000 dividend allowance, meaning the first £1,000 of dividend income is tax-free. This structure can be more tax-efficient than receiving rental income personally.
Example: If you decide to withdraw £10,000 as a dividend: • Personal Ownership: Rental income is taxed at your marginal rate (e.g., 40% for higher-rate taxpayers). • Company Ownership: The first £1,000 is tax-free; the remaining £9,000 is taxed at 33.75%, resulting in a tax liability of £3,037.50, leaving you with £6,962.50. This method allows for more efficient extraction of profits, especially when combined with other allowances and reliefs.
Properties held within a limited company may qualify for Business Property Relief (BPR), potentially reducing the value of the business for Inheritance Tax purposes. To qualify, the company must be a trading business, and at least 50% of its activities should involve more than just holding property for investment. This relief can make it more tax-efficient to pass on property assets to heirs.
Considerations:
• Administrative Costs: Running a company involves additional administrative responsibilities and costs, including annual accounts and corporation tax returns. • Mortgage Availability: Mortgage options for companies can be more limited and may come with higher interest rates compared to personal mortgages. • Capital Gains Tax on Transfer: Transferring personally owned properties into a company can trigger Capital Gains Tax and Stamp Duty Land Tax liabilities. It’s advisable to consult with a tax professional to assess whether using a limited company aligns with your investment goals and personal circumstances.
Navigating the complexities of property investment in the UK requires a keen understanding of tax obligations and the implementation of effective strategies to minimize liabilities. This guide explores various methods to optimize tax positions for property investors.
Capital Gains Tax (CGT): Applied to profits from selling properties.
Stamp Duty Land Tax (SDLT): Charged on property purchases.
Inheritance Tax (IHT): Imposed on the value of your estate upon death.
Understanding these taxes is crucial for effective planning.
Leveraging Allowable Expenses
Deducting allowable expenses from your rental income can significantly reduce taxable profits. These expenses include:
Maintenance and Repairs: Costs for keeping the property in good condition.
Insurance: Premiums for landlord insurance policies.
Professional Fees: Expenses for property management and legal services.
Accurate record-keeping is essential to substantiate these deductions.
Utilizing Capital Gains Tax Allowances
For the 2024/25 tax year, individuals can realize gains up to £3,000 without incurring CGT. Strategically timing asset disposals to utilize this allowance annually can minimize CGT liabilities.
Transferring Assets to a Lower-Tax-Rate Spouse
Transferring property ownership to a spouse or civil partner in a lower tax bracket can reduce overall tax liability. Such transfers are exempt from CGT, allowing both parties to utilize their personal allowances effectively.
Establishing a Property Investment Company
Operating through a limited company can offer tax advantages, such as paying corporation tax on profits instead of higher personal income tax rates. This structure also allows for the deduction of mortgage interest as a business expense.
Investing Through Tax-Efficient Wrappers
Utilizing Individual Savings Accounts (ISAs) and pensions can shelter investment returns from income tax and CGT. Contributing to these accounts can provide tax relief and enhance after-tax returns.
For furnished holiday lets or commercial properties, claiming capital allowances on qualifying expenditures can reduce taxable profits. This includes deductions for plant and machinery used in the property.
Implementing strategies such as gifting property or setting up trusts can mitigate IHT liabilities. It’s crucial to consider the seven-year rule for gifts and the potential impact of recent budget changes on IHT reliefs.
Staying Informed on Tax Legislation
Tax laws are subject to change, as evidenced by recent budget announcements affecting CGT and IHT. Regularly consulting with a tax professional ensures compliance and optimization of tax strategies.
Implementing these strategies requires careful planning and professional advice to ensure compliance with current tax laws and to optimize your tax position effectively.
Frequently Asked Questions (FAQs)
1. What are the primary taxes affecting UK property investors?
UK property investors are subject to several taxes, including:
Income Tax: Levied on rental income.
Capital Gains Tax (CGT): Applied to profits from selling properties.
Stamp Duty Land Tax (SDLT): Charged on property purchases.
Inheritance Tax (IHT): Imposed on the value of your estate upon death.
2. How can I reduce my taxable rental income?
You can reduce taxable rental income by deducting allowable expenses such as maintenance and repairs, insurance premiums, and professional fees. Accurate record-keeping is essential to substantiate these deductions.
3. What is the Capital Gains Tax allowance for the 2024/25 tax year?
For the 2024/25 tax year, individuals can realize gains up to £3,000 without incurring CGT. Strategically timing asset disposals to utilize this allowance annually can minimize CGT liabilities.
4. Can transferring property to my spouse help reduce taxes?
Yes, transferring property ownership to a spouse or civil partner in a lower tax bracket can reduce overall tax liability. Such transfers are exempt from CGT, allowing both parties to utilize their personal allowances effectively.
5. What are the benefits of setting up a property investment company?
Operating through a limited company can offer tax advantages, such as paying corporation tax on profits instead of higher personal income tax rates. This structure also allows for the deduction of mortgage interest as a business expense.
6. How can ISAs and pensions be used in property investment?
Utilizing Individual Savings Accounts (ISAs) and pensions can shelter investment returns from income tax and CGT. Contributing to these accounts can provide tax relief and enhance after-tax returns.
7. What are capital allowances, and how do they apply to property investors?
For furnished holiday lets or commercial properties, claiming capital allowances on qualifying expenditures can reduce taxable profits. This includes deductions for plant and machinery used in the property.
8. How can I plan for Inheritance Tax (IHT) as a property investor?
Implementing strategies such as gifting property or setting up trusts can mitigate IHT liabilities. It’s crucial to consider the seven-year rule for gifts and the potential impact of recent budget changes on IHT reliefs.
9. Why is it important to stay informed about tax legislation changes?
Tax laws are subject to change, as evidenced by recent budget announcements affecting CGT and IHT. Regularly consulting with a tax professional ensures compliance and optimization of tax strategies.
10. Should I consult a tax professional for my property investments?
Yes, implementing these strategies requires careful planning and professional advice to ensure compliance with current tax laws and to optimize your tax position effectively.
For limited company owners, dividends are often a great method to take out your hard-earned profit in a more tax efficient way.
Taking money out through dividends isn’t always straightforward. It’s easy to make a mistake and end up facing an unexpected tax problem.
The most common mistake is when limited company owners view their dividends as their monthly ‘pay’. This viewpoint then results in the ltd company owners drawing out a sum of money each month as a ‘dividend’, with no regard to company performance. That is one big no-no.
This can result in illegal dividends and must be avoided.
Why your dividend might be illegal
There can a few reasons why a dividend might be illegal, including:
Misunderstanding who can legally vote the dividend,
A lack of documentation
Not understanding the need for true profits to be available
As numbers people, we’d like to talk about the profit issue here. For a dividend to be legal there are several things that need to happen. Just marking a bank payment as ‘dividend’ isn’t enough.
Is there sufficient profit to award a dividend?
There needs to be enough ‘profit’ to be able to pay any dividend. You need to be sure this profit exists. So, you need to review the most up to date set of accounts or reports you have before any dividend is considered.
If you are in the ‘cloud’ accounting world, you may have access to this via a product like Xero or QuickBooks. Log in and scroll down to the bottom of your accounts or Balance Sheet report, where you usually see something like this:
For many small businesses, the bottom figure ‘Total Capital and Reserves’ is often a good indicator of whether a dividend can be paid (and potentially how much). However, the figure can contain values that can’t have a dividend paid from them, such as share ‘capital’ (£2 in the above) or ‘share premium’ (not shown here).
In this example, the company looks in a reasonable position on paper to pay a dividend. However, there are some common pitfalls that mean in reality there could not actually be enough profits to pay money as a dividend.
Is your book-keeping accurate and up to date?
One major pitfall can be if your book-keeping isn’t accurate. Your book-keeping may not have taken into account a lot of adjustments such as:
The drop in value of the things (physical assets) your company owns (‘Depreciation’)
Timing adjustments
Provisions for expenses or income not yet made.
Other issues can include:
Dividends in the software are being shown in the ‘Profit and Loss’ report rather than in the Balance Sheet.
You are using last year’s accounts, so the data is likely to be out of date.
Get into the habit of reviewing the Total Capital and Reserves section of the Balance Sheet. It might not be completely accurate or current, but at least you’ll gain some awareness of whether a payment is likely to be ok as a dividend.
The most common scenario we see where dividend payments has gone wrong is where this ‘capital and reserves’ figure is very small, and the owner has not taken into account the adjustments for future tax, timing or depreciation.
There isn’t a generic answer we can give here as it varies wildly, based on your individual situation.
What we can say though that in many cases, the payment can often be reflected as a loan to the director instead. In reality, this is the key consequence of getting this wrong. Under the Companies Act, the shareholders could be asked to repay that dividend (essentially the same treatment as a loan).
I’m worried about making legal dividends
Review your figures and ask your accountant for help in understanding how this all works for you and your company. If you don’t have an accountant, or feel you aren’t making the most of dividends and other limited company tax opportunities with your current accountant, we can help. Just get in touch.
FAQs
1. What are dividends in a limited company, and why are they important?
Dividends are payments made to shareholders out of a company’s profits. They are crucial for owners to extract profit in a tax-efficient manner.
2. What are illegal dividends, and why should they be avoided?
Illegal dividends are payments made without sufficient profits or in violation of legal requirements. They can lead to unexpected tax issues and legal consequences.
3. Why might a dividend be considered illegal?
Reasons for illegal dividends include misunderstanding who can vote on dividends, lack of documentation, and not ensuring true profits are available for distribution.
4. How can I determine if there are enough profits to award a dividend?
Before considering a dividend, review the most recent financial statements or reports to ensure there is enough profit available. Tools like Xero or QuickBooks can help in this process.
5. What common pitfalls should I be aware of when assessing dividend eligibility?
Pitfalls include inaccurate bookkeeping that doesn’t account for depreciation, timing adjustments, or provisions for future expenses. Dividends should be reflected in the Balance Sheet, not just the Profit and Loss report.
6. What should I do if I suspect my dividends might be illegal?
If you suspect illegal dividends, seek advice tailored to your specific situation. In many cases, such payments can be treated as loans to directors, with potential repayment obligations under the Companies Act.
7. How can I ensure I am making legal dividends for my company?
Regularly review your financial figures, particularly the Total Capital and Reserves section of the Balance Sheet, and consult with your accountant for guidance on dividend legality and other tax opportunities.
8. What should I do if I need help understanding dividend payments and related tax opportunities?
If you lack an accountant or feel unsure about maximizing dividend and tax advantages for your limited company, reach out for professional assistance to ensure compliance and efficient financial management.
