TAX TIPS FOR LANDLORDS

TAX TIPS

 Whether you are a new landlord with a single property or an established landlord with a portfolio of properties you need to know the tax implications of being a landlord.

Here are some facts that explain how you can minimise your tax bill by claiming all allowable expenses and some simple planning ideas. It also warns you of some traps to watch out for.

 What expenses can I claim against my property income?

Expenses fall into two categories:

 v  Revenue – these expenses can be deducted from your rental income for tax purposes assuming they are incurred wholly and exclusively for the purpose of the rental business and are not of a capital nature. (See below for examples of such allowable expenditure).

 v  Capital – these expenses are only taken into account for tax purposes when you sell the property. Such expenditure includes the original cost of the land and property and any improvements and alterations.

Tax tip

It is not always straightforward determining whether a particular cost is revenue or capital. but as you can save significant amounts of tax if big cost items are categorised as revenue, it is worth considering whether the costs can be justified as revenue.

 What is the most tax efficient way for me to finance a rental property?

This will depend on your exact circumstances. However, it is worth remembering that you can get tax relief on any interest you pay on borrowings used for a rental property, whereas there is no mortgage interest relief for your own home.

 Tax tip

You may be able organise your borrowings to ensure you get maximum tax relief.

 How should I hold my rental property?

There are many different structures you can use. These include:

 v  Sole ownership

v  Limited company   

v  Partnership

v  Limited liability partnership

 When deciding which entity is right for your circumstances you should consider both the tax and non tax implications. For example, if you do not need the money from your rental business and you are a sole owner, you will still be taxed on your full profits. However, if you incorporated, you would only be taxed on what you withdraw. Furthermore, a company’s tax rate is lower than the higher rates of income tax, so savings may be made.

 Tax tip

You should choose your structure carefully when you set up your rental business because getting the most tax efficient structure can save you significant amounts of tax. You should also review your structure regularly, as circumstances and tax rules change.

 What can I do if my business is making a loss?

If your rental business is loss making, the losses you make can be rolled forward until you start making a profit. When your business does make a profit you can then offset the losses from earlier years against the profit.

 Tax trap

To benefit from losses in future years you must notify HMRC of the losses. The easiest way to do this is on your Self Assessment tax return.

 Will my spouse and I be treated as holding the rental property in equal shares?

If you and your spouse (or civil partner) hold a property jointly, the rental income and expenditure is automatically split 50:50 for tax purposes, irrespective of the proportions in which the property is actually held. You can instead elect with HMRC to have the rental income taxed in the same proportions as the property is legally held.

 Tax tip

If you and your spouse (civil partner) pay tax at different rates, you should review whether it would be beneficial to have a declaration of trust drawn up by a solicitor. This could mean that a higher proportion of the rental income is taxed on the spouse (civil partner) paying the lower rate.

 Examples of revenue expenditure normally allowable for tax

 v  Accountancy fees for preparing our rental business accounts.

v  Advertising and marketing costs

v  Bank charges

v  Cleaning

v  Council tax when the property is available for letting but not let.

v  Gardening

v  Gas and electricity safety certificates

v  Ground rent

v  Insurance on buildings and contents

v  Insurance claim expenses

v  Insurance for loss of rents

v  Interest charges on loans used to improve or build properties (subject to certain conditions)

v  Legal fees

v  Letting agent fees

v  Maintenance charges

 v  Mortgage interest charges

v  Rent collection charges

v  Repairs not providing a significant improvement to the property.

v  Replacing windows – even if you replace single glazed wooden windows with UPVc double glazed windows HMRC will treat this as an allowable revenue deduction

v  Services provision e.g. gas and electricity

v  Telephone calls made in relation to the property

v  Travel costs where the travel is solely for the purpose of the rental business

v  Water rates