2020 has not been an easy year for landlords and with the self-assessment deadline just around the corner, 2021 is not looking any better either – at least from a cashflow perspective.
This is particularly true if you’re a mortgaged portfolio landlord AND a higher rate tax-payer WITH property in personal names.
For those who haven’t taken action yet, it is unfortunately far too late now to do much about oversized tax outflows in 2021, due to three crushing factors:
- The 20/21 year is almost over and time is not on your side
- Section 24 is pushing up landlord tax bills
- The end of Covid-19 payment holidays mean deferred July 2020 tax payments become due
And because of this, many landlords will face their highest ever payment to HMRC on 31st January 2021 – less than 6 weeks away.
However, it is never too late to become more tax efficient in general.
So in this blog and accompanying video we look at why 2021 is likely to be the worst ever year for landlords from a tax payments perspective, and why 2022 will hardly be any better (if you do nothing) – and in many cases worse.
On a brighter note – we’ll also show how effective tax-planning can turn what was expected to be landlords’ worst projected year into their best year yet.
That is, where landlords take action to become more tax efficient and to incorporate their portfolio as a recognised business structure (note this doesn’t have to mean incorporation to limited company ownership).
This will be of particular interest to those landlords who might self-describe as being ‘asset-rich cash-poor’ – and who find themselves in need of a cashflow respite.
After all, as we covered in a recent webinar, profitable businesses can still go bankrupt with poor cashflow planning.
And so, with the tax deadline fast approaching, it may be time to ask yourself if you are confident that your Property Portfolio is as tax efficient as possible?
If not, then 2022 could see you paying next to nothing in taxes (comparatively) on your property business.
Why so many landlords will see their highest payment to HMRC ever on 31st January 2021
Usually when a business is paying more tax it is down to one of two reasons.
- The business is more profitable, making more money, and so more tax is due
- The government change the rules and increase taxes
Unfortunately with Section 24, it is the latter that is impacting most landlords – and only landlords – as the tax changes are focussed solely on the Private Rented Sector.
This leaves landlords facing a ‘tax-escalator’ effect, which the coming chart will show.
If you’re not sure why this is, then check out our article Section 24, Landlords and Tax Payments on Account: The worst is yet to come
Fortunately however, landlords were given some respite in 2020 as the government allowed a deferral of the July 2020 payment on account in order to help all self-employed with cashflow in the wake of the Coronavirus pandemic.
This was much welcomed by landlords, although now that payment is finally falling due on January 31st – 2021 has come around too soon for many.
On the other hand I’m happy to take a punt and say that the majority of landlords and the wider business community cannot wait to leave 2020 behind.
After all, there’s more to life (and business) than taxes.
We have a saying here at Less Tax 4 landlords which is “don’t let the tax-tail wag the planning dog,’ and being such an unprecedented year in the wake of a global pandemic, landlords may have had difficulty in forming coherent plans in 2020.
It is still a fact though that far too many landlords are paying more taxes than necessary. Certainly, paying more taxes could be the best short term option for some. Many landlords are exiting the market and restructuring their business may not make sense at this time.
After all, when deciding on how to structure your business, where you are now is not as important as where you are planning to be (and can realistically get to).
For some landlords, especially those without mortgages and with no plans to grow their business, staying as they are will be the best option.
That said, for those landlords who were higher rate tax payers before the tax changes – and who are now paying even greater amounts of tax – building, running and growing a professional property business in personal names is simply no longer a viable option.
For portfolio landlords doing nothing, the below chart shows the typical impact of Section 24 in tax payment terms, paying 3x as much tax in 2022 as they did in 2018.
This is prior to the payment on account deferral of course, and shows that before Covid, forward planning landlords would have expected 2022 to be their worst projected year.
Note the above chart represents the typical impact of the Section 24 legislation on landlords earning at least £50,000 in total income who did not defer their July 2020 payment on account.
The below chart shows that for those that did defer their July 2020 payment (represented by the yellow bar), 2021 is now the worst year, and we already know from the first graph that January 31st accounts for the worst of that. But 2022 does not look much better!
Indeed, depending on the specifics of your portfolio and especially if you are very highly geared, then 2022 could still be worse than 2021 – even if you have taken the payment on account deferrment.
The heady conclusion is that whether or not you took the payment on account deferral offer – the worst is still to come.
Why Cash Flow Planning is Crucial
In many cases, even though Net Income (after tax and business expenses including financing) remains positive for landlords, failing to plan ahead will cause painful cashflow challenges.
2022 in particular is expected to leave even moderately geared landlords with tax bills higher than they can afford from free cash flow. You can read more about how this is caused by the UKs Payment on Account system meeting the Section 24 tax changes in our article Section 24, Landlords and Tax Payments on Account: The worst is yet to come
Making 2022 Your Best Year Yet
Widely attributed to ancient China, you have likely heard the proverb: ‘The best time to plant a tree was 20 years ago. The second best time is now.’
Well the best time to take action ahead of the Section 24 changes was probably 2015. The second best time is now.
For landlords becoming tax effective in early 2021, their future tax payment schedule would look something more like this:
Adopting a Protective Business Structure from 6th January 2021
As you can see, 2022 tax payments in this scenario are just a tiny fraction of what they would be for the typical portfolio landlord doing nothing (represented by the grey grid behind the bars).
LT4L Co-Founder and Group Director Malcolm Rose explains more about why this is, and talks through some of the graphs above in the video below.
Video Vault Access
Whilst not for everyone, for landlords with property in their own names, mixed partnerships are often the most effective way to become tax-efficient with minimal transactional costs and without tying up your portfolio for double-taxation.
You can find out more in our Video Vault.
Access to the Video Vault is free of charge and comes with instant access to a selection of written case studies and articles, plus extracts from our private webinars and client events.
- Capital Gains Tax and the speculation surrounding recent announcements
- Understanding Hybrid Business Models for Landlords
- High-Level Business Benefits of a well run Mixed Partnership LLP
Subscribers to the Vault will also get priority access to new videos, live webinars and updates.
Understanding Section 24 and Tax Payments on Account
As a founding member of Less Tax 4 Landlords and member of our Operational Board, Ben helps coordinate a wide range of services and insights for the PRS.
With an entrepreneurial background in business growth, sales and marketing strategy; his main claim to fame around here is having come up with the company name back in 2015.
He also works closely with experts across the wider financial and professional services industries through his capacity as co-owner and Director of one of the three Less Tax 4 Landlords founding companies; The Key 2 Growth Ltd.
Less Tax 4 Landlords is a specialist multi-disciplinary consultancy service that helps portfolio landlords maximise the commercial benefits of building, running, and growing a recognised professional property business. This is achieved by housing the following services under one roof: Business Planning, Tax Consultancy, Legal Work, Accountancy, Business Succession Planning, Personal Estate Succession Planning and Financial Advice. By bringing together a wide range of services and expertise, we help you to maximise the value of your business both today and during your lifetime, and to create true inter-generational wealth.
Typically, Less Tax 4 Landlords can help you if you:
- Own rental property in personal names
- Are (or would otherwise be) a higher or advanced rate taxpayer
- Are a portfolio landlord with 4 or more properties and in excess of £50,000 Gross Rental Income, or you have the means, motivation and opportunity to get there and beyond with a protective structure in place
- Are looking to build, run, and grow a professional property business which is capable of being passed on intact to future generations
If Less Tax 4 Landlords are not in a position to help you, our wider corporate group and sister companies may still be able to help. And you can find out more by taking our free initial assessment.
If you would like to find out if we can help you benefit financially from running a professional property business, take our free initial assessment here.