Is your buy-to-let property as tax efficient as it could be?
HM Revenue & Customs views letting out a property as a business thus 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.You can cut your tax bill significantly by claiming back a range of day-to-day costs.
Here we have put together a quick guide to the expenses you can claim for your buy-to-let property.
1) Mortgage fees
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.
2) Mortgage interest
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.
3) 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.
4) 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.
5) 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 increase the value to the property, you can offset expenses to correct general wear and tear.
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 10% 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.
7) 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.
Other direct costs of letting the property such as phone calls, stationary and the costs of travelling between different properties for the purposes of the rental business are also claimable expenses.