Landlords have faced significant changes to the tax system in the last few years so it has never been more important to ensure that all expenses and reliefs available are utilised as far as possible. There are still a number of ways to legitimately reduce the tax liability but care should be taken in order to make best use of them.
Income generated from the rental of a property will usually be reported on an individual’s Self Assessment Tax Return each year. The taxable amount is calculated by deducting the allowable expenses from the rents payable by the tenant. If the property is owned by more than one person, their share of the profits will be reported on their Tax Return. Any tax due will be payable by 31 January following the tax year that the profits relate to.
There are some complex rules to navigate when determining whether expenses incurred in connection with the property will be tax deductible. Some expenses are deducted when arriving at the rental profit each year and some are only allowable when you come to sell the property. It is therefore very important to keep detailed records to evidence any expenditure in relation to the property.
Broadly, any costs incurred that significantly enhance the value of a property will be treated as capital in nature and only deducted when arriving at the taxable gain. So, the costs of building an extension will not be deducted from rental income, whereas the cost of calling out a plumber to fix a broken tap will be.
It is also important to decide whether a cost is a ‘repair’ or a ‘replacement’ as the latter will not usually attract tax relief against rental profits. However, it is not always easy to establish what is classified a repair. For example, is a replacement boiler considered a repair to the central heating system? Or is a replacement dishwasher considered a repair to a fitted kitchen? There is considerable guidance from HMRC on this so it is always best to seek expert tax advice.
Allowable expenses can include:
- Mortgage interest*
- Repairs and redecoration
- Council tax
- Buildings insurances
- Agent fees and management charges
- Service charges
- Ground rents
- Travel costs for inspection visits
*New rules came into force in April 2016 that seek to limit the amount of mortgage interest that can be deducted from rental profits for higher rate taxpayers. Landlords will be able to obtain relief as follows:
- in 2017 to 2018 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
- in 2018 to 2019, 50% finance costs deduction and 50% given as a basic rate tax reduction
- in 2019 to 2020, 25% finance costs deduction and 75% given as a basic rate tax reduction
- from 2020 to 2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction
It has never been more important to ensure that the tax allowances of spouses are utilised to their fullest extent and reliefs such as Principal Private Residence and Lettings Relief are maximised. Many landlords will also be considering the benefits of having their property portfolio transferred into a company as there can be significant tax advantages in certain circumstances.
Landlords should also give thought to how gains made on the eventual sale of any property will be taxed. The rate of Capital Gains Tax payable on the sale of residential property is currently 28% for a higher rate taxpayer (18% for a basic rate taxpayer) but on most other gains it is only 20% and 10% respectively. With careful planning it is not only possible to defer paying the tax when a property is sold but also reduce the rate to the more attractive 20% and 10% rates.
At Stilwell Gray we offer a range of fixed fee services designed to assist UK landlords not only to comply with HMRC requirements but also legitimately structure their tax affairs more efficiently. We work with a number of trusted directors to ensure all of your needs are catered for – whether that is help with obtaining a mortgage or the conveyancing needed as part of the purchase. For more information about our services, feel free to call us on 01962 820375 or view our packages here.