Tax on rental income
As Albert Einstein once said, “the hardest thing in the world to understand is the income tax.” This is especially true for tax on rental income for landlords. In fact, a huge majority of landlords aren’t taking advantage of the allowances open to them to maximise their return on investment, purely because they’re not aware of the rules regarding tax on rental income.
Buy-to-let is a business
The ability to offset loan interest against taxable rental income is a huge advantage for buy-to-let landlords. The reason landlords receive this favourable tax treatment is because ultimately buy-to-let is a business, and therefore tax is only paid on profits. And like any other profitable business, there are lots of ways to offset expenses and reduce the amount of tax that’s payable.
Expenses reduce profits
Every penny claimed as an expense reduces profits which means a lower tax bill. So it’s advisable to save all your receipts and account for every penny spent on your investment(s), even if it’s just a pot of paint. A huge number of landlords pay way over what they should because they don’t know what business expenses they can claim.
Deductible costs (allowable expenses) cover a broad range of items, from letting agent fees and mortgage fees, to property repairs such as painting and decorating, fixing a broken cooker, and even replacing a broken roof. Other allowable expenses are:
Ground rents, building and contents insurance premiums, etc.
Property repairs in the form of furniture and general wear and tear, maintenance and renewals
Mortgage interest and other financial costs
Legal, management and other professional fees like letting agent fees and their associated tenant-finding and management costs
Costs of services provided, including wages
A range of other allowable property expenses, such as telephone calls, stationery charges etc.
It’s worth noting that the expense should be incurred wholly and exclusively for the purpose of the business.
Wear & Tear vs Replacement Basis
There are two different regimes when offsetting costs against the revenue of your lettings business.
The simplest method is to identify expenditure that is connected with the ongoing operations or maintenance of the property. These expenses are typically allowable and proportionately decrease your tax bill.
However, this may not be the most appropriate regime if your rental property is newly refurbished and unlikely to need much maintenance (at least to start with).
In this case, landlords might be better to consider the “wear and tear” allowance as an alternative to the “replacement basis” described above.
The “wear and tear” allowance is a fixed percentage of the net rent received, and allows you to reduce your tax liability even if there has been no maintenance expenditure on the property (providing your residential lettings property is fully furnished). The allowance is calculated as 10% of your total rental income, minus any charges and services that would normally be paid for by the tenant but are paid by you as the landlord (i.e. council tax, water etc.).
However, as a landlord, you need to decide which treatment is most advantageous to you and stick to it. Unfortunately, you can’t claim the “wear and tear” allowance and deduct expenses in the same tax return.
The way you run and manage your taxes directly impacts your profits, so expert tax planning is essential for success. All landlords earning a rental income of £2,500 or more need to complete a self-assessment tax return, and we are very pleased to be able to offer this service as part of our Concierge Package.
How does it work?
At the end of the year, our dedicated team of in-house accountants will prepare a statement of rental income and expenses. With your consent, they then send it across to our nominated firm of external accountants, who will make sure you get the most favourable treatment for any expenses that you have incurred during the year and maximise the use of legitimate tax allowances. We liaise with them directly to provide any further details that they might need, taking nearly all of the admin – and hassle - out of the process for our landlords.
If you suspect you might not be making the most of your exemptions and allowances when filing in your tax return, then give us a call on 0207 099 4000 and we’ll run through how we can help.