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.
NEXT STEPS
Thank you for taking the time to read this guide and get to the end.
I hope you got some value from it and will take some action as a result of reading this today.
If you’d like to have a chat about how we can take the pain away of managing your finances and be on hand to talk to you any time you have a tax or accounts query, then book a short call to speak to us through our website.
On the call we’ll get to know a little bit more about you, what stage you’re at in your business or property journey, and whether we’re a good fit to be your trusted advisor as you start up or grow your business.
I look forward to hearing from you.
Fellow Property Investor and Property Accountant
