Can a Landlord minimise the implications of Mr. Osborne’s recent budget?
The Government’s tax changes for landlords, announced in this summer’s Budget, will eat into landlords’ profits and, in some cases, will wipe them out completely. In Part 1 of my summary, I set out ways of reconstructing your property portfolio to minimise tax. In Part 2, I will set out the main available reliefs which will also reduce your tax exposure.
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.
1 - Mortgage interest
You can currently use the interest you pay on your mortgage each year to offset your tax bill. In a nutshell, higher rate tax paying landlords will no longer be able to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax. In other words, tax will be applied to the rent received – rather than what is left of the rent after the mortgage interest has been paid. However, the Government will allow a tax credit equivalent to basic rate tax (20pc) on the interest.
2 - Mortgage fees
Broker and arrangement fees are currently tax deductible and can be claimed back in the year you arranged a mortgage. However this is also likely to be restricted when the changes to mortgage interest relief come into effect.
3 - 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 £1,350 a year for letting fees alone.
4 - 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.
5 - Buildings and contents insurance premiums
Specialist landlord insurance will cover the building, your liability as a landlord and loss of rent. You can also 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.
6 - 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.
7 - Furniture
The rules here are changing. If the property is furnished, you can currently choose to claim back either a general “wear and tear” allowance or the exact cost of replacing individual items. But from April 2016, landlords will only be allowed to deduct costs that they actually incur. So if you don't spend any money correcting wear and tear, you cannot claim.
8 - Ground rent and service charges
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.
9 - 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.
10 - Miscellaneous
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. Also, as a landlord, you must submit a self-assessment tax return each year. If an accountant prepares this for you the fees are tax deductible. Keep all receipts!
You are welcome to contact Arkade Property to discuss the implications of the new tax changes and the reliefs which can still be claimed.