Last week the Government announced that landlords will only be able to claim tax relief on their mortgage interest payments at the basic tax rate of 20pc, rather than their marginal rate, which could be as high as 45pc.
This was a blow to wealthy landlords, who will see their costs rise as a result.
In his Budget speech, Chancellor George Osborne also announced changes to the tax treatment of maintenance costs for furnished properties.
So how will these changes affect you and what other expenses can you claim for?
Government Agencies views letting out a property as a business like any other, which means all landlords must pay tax on the profits they make – but only after costs are deducted. The taxman calls these “allowable expenses” and they cover a broad range of items.
While most capital expenses – those involved in buying and selling a property, such as the purchase price and agent and legal fees – cannot be used to offset your income tax, many other costs can.
Here we have put together a guide to the expenses you can claim for your buy-to-let property.
You can use the interest you pay on your mortgage each year to offset your tax bill. Currently landlords can claim relief at their personal tax rate.
But the Government will restrict the relief on mortgage interest payments for all landlords to the basic rate of income tax (20pc). The restriction will be phased in over four years, starting from April 2017.
For a 45pc taxpayer, every £100 of mortgage interest they pay costs just £55 after claiming tax relief, but this will rise to £80 when the changes are fully implemented from April 2020.
Broker and arrangement fees are tax deductible and can be claimed back in the year you arranged a mortgage. However this is also likely to be restricted to the basic tax rate when the changes to mortgage interest relief come into effect.
Letting agent fees
If you choose to employ an agent to find a tenant or manage your property, you’ll probably pay between 10pc and 15pc of the monthly rental income in fees. This means on a typical tenancy worth £750 per calendar month, you could claim £1,350 a year for letting fees alone.
Securing a tenant
If you decide to rent your property privately, you can claim back the cost of advertising for tenants, purchasing a tenancy agreement, credit checking, referencing, deposit protection and professional inventory costs. These could come in at more than £300 each time a new tenant moves in, according to the National Landlords Association.
Buildings and contents insurance premiums
Specialist landlord insurance will cover the building, your liability as a landlord and loss of rent. You can also add contents cover, home emergency, legal expenses and rent guarantee insurance. Cover for a typical low-risk buy-to-let property costs around £200 a year.
Maintenance and repairs
Any money you spend keeping the property in a good state of repair is tax deductible. While you cannot claim for renovations, extensions or improvements that add value to the property, you can offset expenses to correct wear and tear.
Property repairs can include mending broken windows and doors, repairing broken cookers, white goods, furniture or guttering, painting and decorating and replacing or fixing the roof.
The rules here are changing. If the property is furnished, you can currently choose to claim back either a general “wear and tear” allowance or the exact cost of replacing individual items.
The wear and tear allowance is 10pc of the rent annually, minus any costs you pay on behalf of the tenant such as council tax. You do not have to have spent any money replacing or repairing the furniture in a given year to claim this allowance.
Alternatively you can claim the exact cost of replacing furniture in the property. This only applies to existing furniture – you cannot claim back the cost of furnishing it in the first place.
But from April 2016, landlords will only be allowed to deduct costs that they actually incur. So if you don't spend any money correcting wear and tear, you cannot claim.
Ground rent and service
If you are a leaseholder, you will usually pay ground rent to the freeholder. Service charges are common in blocks of flats and can vary greatly. Basic charges cover cleaning, maintenance, heating and lighting for common areas, but other costs could include security or concierge staff. You can also claim back any on-site services such as gardening and electrical costs.
Council tax and utility bills
If you pay any council tax or utility bills that a tenant would normally pay, you can claim the whole cost. You can also claim these costs during void periods, when there is no tenant living in the property.
Other direct costs of letting the property such as phone calls, stationery and the costs of travelling between different properties for the purposes of the rental business are also claimable expenses.
Before you submit a tax return
As a landlord you must submit a self-assessment tax return each year. If an accountant prepares this for you the fees are tax deductible.
Lorraine Stevens FMAAT, said to always keep receipts and other proof of payments. “If Government Agencies decides to raise an inquiry it will want to see written proof of all the costs you have claimed.”
Disclaimer: Advice shared in this blog is intended to inform rather than advise. Taxpayer's circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this forum, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.