Is your buy-to-let property as tax efficient as it could be? You can cut your tax bill significantly by claiming back a range of day-to-day costs.
Claiming tax deductibles as a landlord can significantly reduce your HMRC bill. Here’s our guide to what is – and isn’t – an allowable expense. HM Revenue & Customs views letting out a property as a business like any other, which means all landlords must pay tax on the profits they make – but only after costs are deducted. The taxman calls these “allowable expenses” and they cover a broad range of items. While most capital expenses – those involved in buying and selling a property, such as the purchase price and agent and legal fees – cannot be used to offset your income tax, many other costs can.
Finance Broker and arrangement fees are tax deductible and can be claimed back in the year you arranged a mortgage. In fact, any incidental costs associated with taking loan finance are allowable.
You can use all the interest you pay on your mortgage each year to offset your tax bill. If you have an interest-only mortgage, your whole monthly repayments will be tax deductible. If your repayments are roughly equal to your net income, you will not have to pay any income tax on the property at all.
Many savvy landlords keep their property mortgaged even if they can afford to pay it off to benefit from this tax break.
Letting agent fees
If you choose to employ an agent to find a tenant or manage your property, you’ll probably pay between 10pc and 15pc of the monthly rental income in fees. This means on a typical tenancy worth £750 per calendar month, you could claim as expenses £1,350 a year for letting fees alone.
Securing a tenant
If you decide to rent your property privately, you can claim back the cost of advertising for tenants, purchasing a tenancy agreement, credit checking, referencing, deposit protection and professional inventory costs. These could come in at more than £300 each time a new tenant moves in, according to the National Landlords Association.
Buildings and contents insurance premiums
Specialist landlord insurance will cover the building, your liability as a landlord and loss of rent. You can also typically add contents cover, home emergency, legal expenses and rent guarantee insurance. Cover for a typical low-risk buy-to-let property costs around £200 a year.
Maintenance and repairs
Any money you spend keeping the property in a good state of repair is tax deductible. While you cannot claim for renovations, extensions or improvements that add value to the property, you can offset expenses to correct wear and tear.
Property repairs can include mending broken windows and doors, repairing broken cookers, white goods, furniture or guttering, painting and decorating and replacing or fixing the roof.
If the property is furnished, you can choose to claim back either a general “wear and tear” allowance or the exact cost of replacing individual items.
The wear and tear allowance is 10pc of the rent annually, minus any costs you pay on behalf of the tenant such as council tax. You do not have to have spent any money replacing or repairing the furniture in a given year to claim this allowance.
Alternatively you could claim the exact cost of replacing furniture in the property. This only applies to existing furniture – you cannot claim back the cost of furnishing it in the first place.
Ground rent and service
If you are a leaseholder, you will usually pay ground rent to the freeholder. Service charges are common in blocks of flats and can vary greatly. Basic charges cover cleaning, maintenance, heating and lighting for common areas, but other costs could include security or concierge staff. You can also claim back any on-site services such as gardening and electrical costs.
Council tax and utility bills
If you pay any council tax or utility bills that a tenant would normally pay, you can claim the whole cost. You can also claim these costs during void periods, when there is no tenant living in the property.
Until April 6 2015, landlords can claim a special tax deduction of up to £1,500 per property for insulation. The Landlord Energy Saving Allowance covers the cost of installing wall, floor, loft or hot water insulation, as long as it is fitted to a finished property and is not still under construction.
Other direct costs of letting the property such as phone calls, stationery and the costs of travelling between different properties for the purposes of the rental business are also claimable expenses.