Ask any landlord about the finances involved of letting out a residential property and odds on you'll hear a complaint about the income tax due on the rental income, and the higher the income the higher the tax is inevitable.
There's no avoiding tax however, no amount of grumbling will change that, HMRC class residential lettings as a 'property business', whether you have one house or twenty on your books. As with everything involving tax, there are various loopholes/expense claims that budding property magnates can take advantage of and offset on your income tax. Here we offer a few tips to get you started down the right road...
Tax allowances you can claim: Whatever the size of your property business and however many properties you own, the expenses you're entitled to do not change. When the time comes to filing the self assessment tax return, you must put the gross total rental income (total rental income, no matter if it's profit or not) and then list your deductable tax expenses. The end result is paying tax from the profits after all expenses have been accounted for, so what expenses can a landlord claim for?
Five tax expenses you can claim 1. Insurance and mortgage: When you rent out a property, you are able to claim the interest on any loan used to buy the property. For example, if you have a commercial mortgage, or other form of commercial property finance on the property, you can claim your annual 'interest only' payments as a tax expense. Bear in mind that you cannot claim any capital repayment as a tax allowance. You can also claim any premiums that you pay for any buildings and contents insurance on the rental property.
2. Utility bills: Most of the time, your tenants will meet the cost of their utilities. However, if you do pay the water, electricity or gas bills (or if you pay the Council Tax) you can claim these as allowable tax expenses.
3. Professional fees: Some professional fees can also be offset against your rental income. For example, you can claim legal fees for renewing a lease for less than fifty years or for lets of a year or less. You can also claim the fees you pay your accountant for preparing your tax return.
4. Repairs and general maintenance of the property: If you're renting out to students regularly, you'll know maintenance and repair costs will be a regular expense, it's also classed as a tax expense as all houses need a certain amount of upkeep. If it can be easily classed as a repair, it can be put on your tax return; just don't try getting away with 'improvements' such as a new patio or conservatory.
5. The fees your agents charge: If you have settled on hiring an letting agent to manage the property and deal with the tenants, the management fee you pay to them can be passed on to HMRC. Letting agents will normally tag on a monthly fee to the rent as well as charge a fee for finding new tenants when required.
Along with all these tax allowable expenses there are numerous others that a landlord can claim for. For example any advertising costs required in order to gain tenant interest, cleaning costs and ground rent. Similarly, should service charges be required on your property, say if you own a flat/s, then you can offset these against your rental income too.
Completing your tax return: Filling out your tax return is essential to ensure that you do not end up paying more (or less!) tax than is necessary for your circumstances. There are two different ways to complete your tax form, which one is right for you depends upon how much you earn on rental income. For example, if your property income comes to less than 68,000, then you do not have to provide a detailed list of the total expenses and income on the return. Although if your property income totals at over 68,000 you will have to provide a detailed breakdown to HMRC who will demand to know exactly where all your expenses are going and where all your income is coming from.
There's no avoiding tax however, no amount of grumbling will change that, HMRC class residential lettings as a 'property business', whether you have one house or twenty on your books. As with everything involving tax, there are various loopholes/expense claims that budding property magnates can take advantage of and offset on your income tax. Here we offer a few tips to get you started down the right road...
Tax allowances you can claim: Whatever the size of your property business and however many properties you own, the expenses you're entitled to do not change. When the time comes to filing the self assessment tax return, you must put the gross total rental income (total rental income, no matter if it's profit or not) and then list your deductable tax expenses. The end result is paying tax from the profits after all expenses have been accounted for, so what expenses can a landlord claim for?
Five tax expenses you can claim 1. Insurance and mortgage: When you rent out a property, you are able to claim the interest on any loan used to buy the property. For example, if you have a commercial mortgage, or other form of commercial property finance on the property, you can claim your annual 'interest only' payments as a tax expense. Bear in mind that you cannot claim any capital repayment as a tax allowance. You can also claim any premiums that you pay for any buildings and contents insurance on the rental property.
2. Utility bills: Most of the time, your tenants will meet the cost of their utilities. However, if you do pay the water, electricity or gas bills (or if you pay the Council Tax) you can claim these as allowable tax expenses.
3. Professional fees: Some professional fees can also be offset against your rental income. For example, you can claim legal fees for renewing a lease for less than fifty years or for lets of a year or less. You can also claim the fees you pay your accountant for preparing your tax return.
4. Repairs and general maintenance of the property: If you're renting out to students regularly, you'll know maintenance and repair costs will be a regular expense, it's also classed as a tax expense as all houses need a certain amount of upkeep. If it can be easily classed as a repair, it can be put on your tax return; just don't try getting away with 'improvements' such as a new patio or conservatory.
5. The fees your agents charge: If you have settled on hiring an letting agent to manage the property and deal with the tenants, the management fee you pay to them can be passed on to HMRC. Letting agents will normally tag on a monthly fee to the rent as well as charge a fee for finding new tenants when required.
Along with all these tax allowable expenses there are numerous others that a landlord can claim for. For example any advertising costs required in order to gain tenant interest, cleaning costs and ground rent. Similarly, should service charges be required on your property, say if you own a flat/s, then you can offset these against your rental income too.
Completing your tax return: Filling out your tax return is essential to ensure that you do not end up paying more (or less!) tax than is necessary for your circumstances. There are two different ways to complete your tax form, which one is right for you depends upon how much you earn on rental income. For example, if your property income comes to less than 68,000, then you do not have to provide a detailed list of the total expenses and income on the return. Although if your property income totals at over 68,000 you will have to provide a detailed breakdown to HMRC who will demand to know exactly where all your expenses are going and where all your income is coming from.
About the Author:
Howard writes for Just Commercial Mortgages the UK's No1 site for the latest commercial mortgage rates and commercial property finance news.