Never pay a penny more than you must in capital gains and income tax
No one likes paying tax. Or, at least, no one I know. I certainly don’t. So, when it comes to tax time and completing my Self Assessment forms, I make sure I claim every single allowance and deduction I possibly can. You should, too.
In this article, you’ll learn the deductions you can make and what paperwork you must keep in support of your claims.
You are a business in all but name
As a property investor and buy-to-let landlord, you are running a business. The main difference between owning property as a personal name and as a limited company is the way in which you are taxed.
Setting up as a limited company to invest in property might be beneficial, especially for those growing a property portfolio or who are higher rate taxpayers. The way that mortgage interest is treated is more advantageous in a company structure.
In this article, I examine the deductions that can be made by individual property investors. As you’ll discover, even though you won’t be taxed in the same way as a business, it’s important that you approach life as a buy-to-let landlord with a business-like attitude. After all, you do want to reduce your tax bill, don’t you?
Expenses you can claim
In the running of your buy-to-let business, you will incur expenses. Some are obvious, while others are less so. Generally, anything that you pay out to keep your business running can be claimed against your rental income to reduce tax. These are called ‘allowable expenses’, and include:
- Property management fees
- Landlord insurance premiums
- Service charges
- Legal and accountancy fees
- Ground rent
You may also deduct utility bills and council tax, during periods when the property is untenanted or if you pay the bills on the tenant’s behalf.
Other expenses you can claim include phone calls, stationery, advertising, and the cost of travelling to and from your buy-to-let property.
Rules when claiming expenses
When you are claiming expenses, there are two rules that you must observe:
- The expense must be wholly and exclusively incurred for your buy-to-let property
- If only part of the expense relates to the property, you may only claim that part
Maintenance and wear and tear
In the good old days, you could claim 10% of your rental income as maintenance and wear and tear. This has now changed. Now, you can only claim for things that you buy or services you pay for. For example, if you pay someone else to clean the property, you can offset this expense against your rental income.
If you buy a new sofa to replace an old one, you can claim this cost, though there are special rules for this. This is known as ‘Replacement of Domestic Items relief’.
How does Replacement of Domestic Items relief work?
Items within the property will wear out. From time to time, you’ll need to replace items that you include with the property, such as:
- White goods (fridges, freezers, cookers, etc.)
The taxman will only let you claim the cost of a like-for-like replacement.
For example, let’s say that your tenant calls and says the cooker is kaput. If you send a maintenance technician and they repair it, you can claim the whole cost – the labour and any replacement part. However, if the cooker needs replacing, you can only claim the cost of a ‘new’ cooker that is very similar to the old one (same age, make and model, for example).
Mortgage interest payments
You can also claim against your mortgage interest payments, though how to do this is changing. You used to be able to claim all the mortgage interest payments as an allowable expense. In this tax year (2018/19), you can only claim 50% of these payments directly against your rental income. On the remaining 50%, you can claim tax relief at 20% (the basic rate of income tax).
By 2020/21, you will only be able to claim basic rate tax relief on the entire mortgage interest payments. This will affect you negatively if you are a higher rate or additional rate taxpayer. You can read more in our article “How will the change to mortgage interest tax relief affect me as a property investor?”
Improvements made can’t be claimed
The rules covering maintenance and replacement of goods do not apply to improvements you make to your investment property. So, if you add a conservatory or undertake renovation work, you can’t claim the cost in the tax year that you make those improvements.
The costs of improvements like these are considered to add value to the property. Which they should, otherwise, why make them? Therefore, they are considered to be capital expenditures, and might be claimed when you eventually sell the property.
Don’t rely on the taxman trusting you
You should understand that the taxman doesn’t trust you. If you tell him that you visited the property every other week, and claim the costs of doing so, he’ll want to see proof. My advice is to keep every single receipt you receive.
Open a file for each tax year and separate it as to type of expense. Keep all quotes, invoices, payment confirmations, receipts, mortgage statements, and so on. Open a book to record your visits to the property, and have the tenant sign it each time.
Always see advice
The above is general guidance. You should always seek the advice of a qualified accountant, and one who is experienced in the buy-to-let market. While it may be possible to do your own tax affairs, it’s my experience that a good accountant will be worth every penny of their charges.
Never pay a penny more in tax than you should, and always buy in the best places to invest in property UK.
Our aim is to help investors achieve their lifestyle ambitions through property investment. To book a strategy consultation, contact Gladfish today on +44 207 923 6100. We’ll discuss your goals, your financial position, how property can help you reach your desired lifestyle faster, and how you can structure your investment to pay less tax.
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