If owning a property did not already come with enough financial hassle, being a landlord takes the game to a whole new level. Landlords who are trying to negotiate the tax minefield often wonder whether they’re paying far too much or are not claiming what they are owed.
One of the first issues to address is whether personal ownership is really the best option. Other vehicles such as companies and pension schemes may offer tax deferrals or real savings in some circumstances.
Ultimately, being a landlord, whether you have one property or a hundred, is a business, and as with any business, it is important to keep proper records. Her Majesty’s Revenue & Customs (HMRC) is targeting small businesses over record-keeping, and landlords are no exception. Good records are doubly useful: in addition to avoiding hefty fines, they make it easier to identify deductible costs.
So, what are these deductible costs? Many landlords are already going to be aware of the most common ones such as mortgage interest and agent’s fees, but some may not, and so here is an overview — as well as some useful tips that many landlords will be unaware of.
Deductible costs
Firstly, repairs, even significant ones, can be claimed as expenses, and in fact even minor elements of improvement may be claimed as repairs. Also, if a property is let furnished, while the costs of the furnishings are not deductible, a ‘wear and tear allowance’ based on 10% of rents may be claimed and is often more beneficial. Even if ‘wear and tear’ is claimed, certain repairs and replacements can still be claimed, as well.
Mortgage interest on the property or portfolio of properties can also be claimed, and if you extended the mortgage on your own home to buy the rental property, you may be able to claim some of the interest paid on that loan as well.
If none of the above is news to you, here is one that’s often overlooked. Most expenses are fairly obvious, but are you claiming for visits to check the property yourself? If the trip is purely for the property, business travel costs or mileage can be claimed. However, if it’s your holiday home as well, you may struggle to claim two weeks in the sun as an ‘inspection visit’.
Joint ownership
For properties that are jointly owned, the rules get a little more complex.
Firstly, you have to be sure the income from the property is shared in the correct way. If you are not married to the joint owner you can share the income any way you want and the tax split follows the actual split, even if the beneficial ownership is in different percentages.
This may be beneficial if you are supporting offspring at university, as you can give them income to be taxed at their own rate rather than yours, without giving them more than a very small percentage of the property.
For married couples, there are a few more limitations: they can only share the income 50/50 or in the actual ownership percentages, and only then if they give notice to HMRC (on Form 17) before the start of the tax year. However, on the upside, married couples can transfer property interests between themselves with no capital gains tax.
It’s also worth noting that if the property is a furnished holiday letting, it may be possible to get Entrepreneurs’ Relief when it is sold, bringing the Capital Gains Tax rate down to 10%. If there are several such lettings, but only one is being sold, then planning between spouses can still give access to this lower rate of tax.
Residence issues
Where landlords are not resident in the UK, it’s important to comply with the non-resident landlord scheme. Without joining the scheme, the tenants or agent are required to deduct 20% tax from the rent and pay it to the Revenue, not the landlord. This means you would miss out on relief for your expenses.
Capital Gains Tax
Finally, if the property has been, or could be, your own residence, then you may qualify for ‘principal private residence relief’, topped up with up to £40,000 of ‘lettings relief’ – and this can be doubled if the property is owned jointly.
The principal private residence relief and lettings relief can be very valuable and can be claimed on more than one property. Provided the facts fit, ‘flipping’ between two or more properties is not just for MPs!
Bottom line
HMRC offers guidance on tax claims in its ‘Property Manual’, but if you want to make the most of all the tax deductions, it’s probably best to seek professional advice. There are penalties for getting things wrong, but an adviser will ensure this does not happen and could be saving you more money than they cost.
* Tony Bernstein is an expert on property tax at H.W. Fisher & Company, Chartered Accountants
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