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Tax Tips for HMO Landlords and Investors

The appeal of Houses in Multiple Occupation (HMO) has grown in recent years

The potential for increased yields is a major factor for those looking to enter the buy-to-let market and the demand for flexible, affordable and social living attracting people from all walks of life.

However, the HMO market is a specialist one and it’s important for potential investors, especially HMO mortgage first time landlords, to research and plan before taking the plunge. Here are some top tips to help you get it right first time.

Ask the experts

Take advantage of professional advice. Speak to a qualified accountant or tax specialist to advise on the most tax-efficient options, a solicitor to handle the property purchase or sale, a specialist mortgage broker to find the best HMO loan and a letting agent to manage and maintain your property. Having a team you can trust will give you peace of mind knowing everything is covered.

Have a clear vision

Knowing your plans for tomorrow means you can set up your HMO rental property in a tax-efficient way. Think about whether the property is a one-off purchase or whether you’ll want to grow your portfolio in the future? Is it a retirement fund or are you investing for the next generation? Will you keep your HMO(s) long-term or look to sell after a few years? The tax implications for things like Capital Gains Tax and Inheritance Tax will be different depending on which path you choose.

Choose your structure – private individual or limited company

Consider whether you’re going to own your HMO(s) as a private individual or within a limited company. The recent reduction of tax relief for private individuals has increased the popularity of limited company investment structures. The main benefits are that corporation tax is lower (currently 19%, regardless of annual income) and there is 100% tax relief on mortgage interest.

It’s important to know that should you decide to change from a personal to a limited company arrangement at a later date, this will be classed as a sale and purchase transaction, resulting in associated costs and fees such as Stamp Duty Land Tax, Capital Gains Tax, conveyancing/legal fees and Early Redemption Charges (if applicable).

Your accountant or tax adviser will recommend the best approach based on your circumstances.

Take advantage of reduced VAT for HMO conversions

There are special provisions which enable ‘qualifying’ property conversions, most commonly a conversion of a single-let property to an HMO property, to be eligible for a 5% reduced rate of VAT.

The 5% VAT rate applies to materials and services related to the conversion and any repairs or construction works within the immediate vicinity of the building site such as a garage.

Knowing your way around all of the tax issues related to HMOs could save you money!

Making tax digital – be aware

The housing and property markets are constantly changing so it pays to keep up-to-date with the latest developments and changes in tax and regulation. For example, the introduction of the Government’s Making Tax Digital programme – designed to transform tax administration so it’s more effective, efficient and easier to submit- has implications for the way you keep and submit records. This comes into force for VAT from April 2022 and Income Tax from April 2023. Corporation Tax is being considered but will not be included until at least 2026.

Get the right HMO mortgage

Ask a specialist independent HMO mortgage broker to help you find the right HMO mortgage. At Vincent Burch we pride ourselves on being right up-to-date on the latest news and have access to competitive rates from a range of HMO mortgage lenders such as Precise, Landbay and CHL Mortgages. Our friendly advisers have extensive knowledge and will be happy to talk about making the most of your HMO business now and in the future.

The appeal of Houses in Multiple Occupation (HMO) has grown in recent years

The potential for increased yields a major factor for those looking to enter the buy-to-let market and the demand for flexible, affordable and social living attracting people from all walks of life.

However, the HMO market is a specialist one and it’s important for potential investors, especially HMO mortgage first time landlords, to research and plan before taking the plunge. Here are some top tips to help you get it right first time.

Ask the experts

Take advantage of professional advice. Speak to a qualified accountant or tax specialist to advise on the most tax-efficient options, a solicitor to handle the property purchase or sale, a specialist mortgage broker to find the best HMO loan and a letting agent to manage and maintain your property. Having a team you can trust will give you peace of mind knowing everything is covered.

Knowing your plans for tomorrow means you can set up your HMO rental property in a tax-efficient way. Think about whether the property is a one-off purchase or whether you’ll want to grow your portfolio in the future? Is it a retirement fund or are you investing for the next generation? Will you keep your HMO(s) long-term or look to sell after a few years? The tax implications for things like Capital Gains Tax and Inheritance Tax will be different depending on which path you choose.

Choose your structure – private individual or limited company

Consider whether you’re going to own your HMO(s) as a private individual or within a limited company. The recent reduction of tax relief for private individuals has increased the popularity of limited company investment structures. The main benefits are that corporation tax is lower (currently 19%, regardless of annual income) and there is 100% tax relief on mortgage interest.

It’s important to know that should you decide to change from a personal to a limited company arrangement at a later date, this will be classed as a sale and purchase transaction, resulting in associated costs and fees such as Stamp Duty Land Tax, Capital Gains Tax, conveyancing/legal fees and Early Redemption Charges (if applicable).

Your accountant or tax adviser will recommend the best approach based on your circumstances.

Take advantage of reduced VAT for HMO conversions

There are special provisions which enable ‘qualifying’ property conversions, most commonly a conversion of a single-let property to an HMO property, to be eligible for a 5% reduced rate of VAT.

The 5% VAT rate applies to materials and services related to the conversion and any repairs or construction works within the immediate vicinity of the building site such as a garage.

Knowing your way around all of the tax issues related to HMOs could save you money!

Making tax digital – be aware

The housing and property markets are constantly changing so it pays to keep up-to-date with the latest developments and changes in tax and regulation. For example, the introduction of the Government’s Making Tax Digital programme – designed to transform tax administration so it’s more effective, efficient and easier to submit- has implications for the way you keep and submit records. This comes into force for VAT from April 2022 and Income Tax from April 2023. Corporation Tax is being considered but will not be included until at least 2026.

Get the right HMO mortgage

Ask a specialist independent HMO mortgage broker to help you find the right HMO mortgage. At Vincent Burch we pride ourselves on being right up-to-date on the latest news and have access to competitive rates from a range of HMO mortgage lenders such as Precise, Landbay and CHL Mortgages. Our friendly advisers have extensive knowledge and will be happy to talk about making the most of your HMO business now and in the future.

Contact us today for personal mortgage advice and a quote, call 01603 856936 or email [email protected]

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