In this article, we cover the expenses a landlord can claim against the income from renting a property and also a reminder of the changes to the tax allowable on interest for buy to let mortgages.
As a landlord you incur expenses and the good news is that you can reduce your tax bill by claiming for many of these costs. However, the rules can be complex.
The costs that you claim should be incurred wholly and exclusively for renting out your property. The most common expenses you can claim are:-
Where only part of the expense meets the wholly and exclusively condition, you can claim that part. If you let part of your home, or let it for part of the year, you will need to apportion your expenses.
Wear and tear allowance
If the property is fully furnished, you used to be able to claim for wear and tear of furnishings, such as cookers, carpets, and TVs. The wear and tear allowance allowed you to claim a maximum of 10% of the net rent (rent less costs) each year. This has now changed. Now you are allowed to claim tax relief on anything you spend on replacing what it labels as a “domestic item” (HMRC definition). This only applies to items you are replacing.
Replacement of domestic items relief
The government lists a number of examples of what domestic items qualify for this new relief. These include replacement; beds, carpets, crockery or cutlery, curtains, fridges, freezers, washing machines, sofas, etc.
If you need to pay to dispose of an item, then that cost is allowable.
Set up costs & capital costs
You can’t claim tax relief on the actual cost of fitting out a property for the first time with furniture and appliances. Also, you cannot deduct expenses of a capital nature from the rental income you earn. That means you can’t deduct the cost of building an extension or renovating a home that’s in a rundown state. You may, however, be able to use the cost of these investments to reduce your capital gains tax bill when you come to sell your rental property. This will be the subject of a further blog.
Interest on buy-to-let mortgages
In the past, there’s been a major tax advantage if you have a buy-to-let mortgage – you only need to declare rental income after you’ve paid your mortgage interest, which helps to reduce your tax bill. However, since April 2017, the way landlords have to declare their rental income has changed, meaning most will see their tax bills rise.
Landlord mortgage interest tax relief (prior 2017)
Under the old regime, you would only pay income tax on your net rental income or profits. In other words, you’d first deduct the interest from the mortgage on your rental property, as well as any other expenses incurred (see above). With many landlords being on interest-only mortgages, this meant they could claim all of their mortgage repayments.
Landlord mortgage interest tax relief (post 2017)
Since April 2017, the system of calculating tax bills on rental income has changed, and by April 2020, you won’t be able to deduct all of your mortgage expenses from rental income to reduce your tax bill. Instead, landlords will be given a new tax credit, which is less generous than the current regime (see below). The government has introduced new mortgage interest rules over a four year period.
Landlord mortgage interest tax relief (April 2020)
From April 2020, landlords will no longer be able to deduct their mortgage costs from their rental income. All of the rental income you earn will be taxable, and you’ll instead receive a 20% tax credit for your mortgage interest. This means you can cut your final tax bill by 20% of your interest. To work this out, simply multiply the mortgage interest you pay by 20%. This new system will potentially increase your tax bill in two ways.
If you’re a higher or additional-rate taxpayer, you won’t get all the tax back on your mortgage repayments, as the credit only refunds tax at the basic 20% rate, rather than the top rate of tax paid.
Also, you could also be forced into a higher tax bracket because you’ll need to declare the income that was used to pay the mortgage on your tax return. This could push your total income into a higher tax brackets
Does incorporation help?
The changes explained above only affects private landlords. In theory, by setting up a business that owns rental properties, landlords will be able to continue to declare rental income after deducting the mortgage. But, if you’re considering doing this it is important to research it thoroughly and get help. Rodliffe can help you plan this.
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