We all hate paying tax, it’s difficult to calculate and seems to be forever increasing.
It’s highway robbery the way the new tax changes can simply ride in and steal away so much of your profits from your property investment. But for property investors who know the rules, there is a fistful of valuable deductions you can make and will still be able to make after the tax changes come into force.
When you are designing your property investment strategy and considering investment cash flow, remember these nine golden eggs, (known as tax reducing deductibles) the taxman has laid for you. Number 9 is still an egg, it just changed shape recently!
1. Mortgage Fees
When you take out your buy-to-let mortgage, the lender will ask you to pay an arrangement fee. Actually, this is a neat trick by the lender to make its interest rate look lower. By charging a fee of, say, 1% of the mortgage amount, the lender can charge a lower interest rate and still make the same profit overall.
Under the current tax rules, an arrangement fee is not classed as a capital cost and so can be deducted from rental income. Even better, it can be deducted from rental income in the year in which the arrangement fee was incurred – or added to the mortgage. Usually, the arrangement fee is added to the loan amount, and so for first-year cash flow purposes, you should deduct this amount from your rental income.
Some tax advisors might tell you that if you add the arrangement fee to the loan then the tax-deductible has to be taken over the life of the loan: that simply is not the case. (If you want to read all the tax regulations covering this, feel free to explore the HMRC’s Property Income Manual. You’ll find all the information your accountant will need in section PIM2066: the relevant legislation is the Income and Corporation Taxes Act 1988 Section 77, and Income Tax (Trading and Other Income) Act 2005 section 272.
2. Solicitor’s Fees
When you buy an investment property, you’ll be dealing with a solicitor whose job it is to ensure everything is legal and above board. Make sure that you ask your solicitor to provide an itemised bill that splits out the cost of advice for the purchase and the part that deals with the mortgage. It’s called a Completion Statement. The charge your solicitor makes for dealing with the mortgage and the lender can be deducted from your rental income. The remainder (the advice on the purchase itself) can be claimed against capital gains.
Oh, and while we’re talking about solicitor’s fees – when remortgaging, you must claim the entire solicitor fee against your rental income. If you don’t, you won’t get a second bite of the cherry because this fee can’t be claimed against your capital gain when you sell.
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When it comes to solicitor’s fees, as Michael Caine would say, “Not a lot of people know that!”
3. Letting agent and property management fees
I always recommend that a property investor should use a letting agent and property manager. After all, the aim of investing in property is to make your life easier and more fulfilling, not to create a second job that will take over your life. The average fee is around 10% to 15% of monthly rental income. If your tenant pays £800 per month, you could deduct around £120 (£1440 per year) from your rental income and reduce your tax bill accordingly.
If you do decide to find your own tenant, you can still claim the cost of advertising, credit checking, and professional inventory costs.
As a buy-to-let landlord, you’ll need specialist insurances. These will cover the building, landlord’s liability, and loss of rent. You might want to add insurance to cover contents, home emergencies, and legal expenses. The cost of these insurances can be deducted from rental income when calculating your income tax liability.
5. Maintenance and repairs
Make sure that you keep a record and all receipts of any money paid out on maintenance and repair because all these costs can be claimed. You can’t claim for a renovation or extension that adds value to the property, but you can claim for things like painting and decorating, new cookers, repairs to boilers and hot water systems, fixing the roof, and so on.
6. Council tax and utility bills
If you pay the council tax and utility bills that would normally be paid by the tenant, then you can claim these costs. This is very important to remember, especially during periods when the property is untenanted.
7. Other costs
Other costs that you can deduct from rental income for tax purposes include:
- Any costs incurred in finding a tenant, such as telephone calls and stationary
- Travel costs incurred when travelling between properties if the journey is made for ‘business purposes’
- If you pay ground rent or service charges as a leaseholder, these can also be deducted
8. Your accountant’s bill
Whether you submit your own self-assessment to the taxman or you have an accountant do it for you, always make absolutely certain that you keep all receipts and proof of payment of all bills and expenses. And also remember that if an accountant does your self-assessment, then this cost is also tax deductible.
9. Mortgage Interest Relief
Despite it being cut we’ll still benefit from a 20% deduction or add back on our mortgage payments. This still means many of us will be paying 20% tax on our expenses.
‘Tax on expenses you say!’
That’s right, this goes against most if not all countries accounting standards that tax should be charged on the profit, not the expense.
UK Property Tax Calculator
Use this calculator, if you want to understand how the tax changes affect you and your property portfolio so you can create a strategy and adapt while the market is good.
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