Minimising your tax liability
In order to make sure the tax liability on your rental profit is a small as possible, keeping a record of what expenses your rental property has incurred is vital.
There are different rules for what can and cannot be claimed for residential properties and furnished holiday lets and these will be explained below.
Allowable expenses are things you need to spend money on throughout the day-to-day running of the property, such as:
- Letting agents’ fees
- Legal fees for lets of a year or less, or for renewing a lease for less than 50 years
- Buy to let accountants’ fees
- Buildings and contents insurance
- *Interest on property loans.
- Maintenance and repairs to the property but not improvements, (such as replacing a laminate kitchen worktop with a granite worktop)
- Utility bills, like gas, water and electricity
- Rent, ground rent, service charges
- Council Tax
- Services you pay for, like cleaning or gardening
- Other direct costs of letting the property, like phone calls, stationery and advertising
*Interest on property loans/mortgages
From 2017-18 this is changing to 75% with the remaining 25% restricted to the basic rate or tax (20%) and continues as follows:
- 2018-19 – 50% of Mortgage Interest can be deducted from profits – 50% available as a basic rate deduction
- 2019-20 – 25% of Mortgage Interest can be deducted from profits – 75% available as a basic rate deduction
- 2020-21 – 0% of Mortgage Interest can be deducted from profits – 100% available as a basic rate deduction
Replacement cost of furnishings
If you have rented out properties in the past you may have claimed a 10% wear and tear allowance on your furnished rental property. This has now been replaced by a provision for the deduction of expenditure on the replacement of domestic items such as furniture, furnishing, appliances (including white goods) and kitchenware in a let dwelling-house. You will not get relief on the initial cost of the furniture or other capital items.
The deduction will be for expenditure incurred on or after 1 April 2016 for corporation tax payers and 6 April 2016 for income tax payers
Any expenditure you have incurred on the property which is capital in nature, for example purchasing the property or building an extension/loft conversion, is not an expense that can be set against your rental income.
Instead this capital expenditure will help reduce any capital gain which may arise when you come to sell the rental property. It is vital that you also keep a record of these expenses, though you will not need them until you sell.
Furnished holiday lets
Furnished holiday lets, assuming you meet the qualifying conditions (see below), are treated as a trade for tax purposes and therefore have certain advantages over other ordinary buy to let properties.
These advantages are:
- Plant and machinery capital allowances on furniture, furnishings, etc. in the let property, as well as on equipment used outside the property (like vans and tools)
- Capital Gains Tax reliefs – Business Asset Rollover Relief, Entrepreneurs’ Relief, relief for gifts of business assets and relief for loans to traders
- Profits count as earnings for pension purposes
You can only claim these if all the following conditions apply:
- The property is offered to let for at least 210 days a year
- It’s let for more than 105 days a year
- No single let is more than 31 days
- You charge the going rate for similar properties in the area (‘market value’)