Nine ways to increase your buy-to-let profits
Changes announced in the Budget will significantly increase landlords’ tax bills. Here’s our guide to what you can – and can’t – claim back from the taxman
The Government’s tax changes for landlords, announced in the summer Budget, will significantly eat into landlords’ profits and, in many cases, will wipe them out completely.The changes are so complex that their true impact was only fully understood months after the announcement.
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?
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 currently use the interest you pay on your mortgage each year to offset your tax bill. Landlords can claim relief at their personal tax rate.
But radical reforms are being introduced that will change this.
In a nutshell, landlords will no longer be able to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax.
In other words, tax will be applied to the rent received – rather than what is left of the rent after the mortgage interest has been paid.
So tax rates will, for some, exceed 100pc: landlords will have to pay all of their profit in tax, and then pay more tax still.
The Government will allow a tax credit equivalent to basic rate tax (20pc) on the interest, but this will do little to offset the increased cost.
A full worked example, and explanation of the tax change, is here. And here is our buy-to-let tax calculator, built in October 2015, that can help with an estimate for your own circumstances.
The tax increase, on which there was no consultation, will be phased in from 2017 and fully implemented by 2020.
Smith & Williamson has calculated that any higher-rate taxpayer landlord whose mortgage interest is 75pc or more of their rental income, net of other expenses, will see all of their returns wiped out by 2020.
For additional-rate (45pc) taxpayers, the threshold at which their investment returns are wiped out by the tax is when mortgage costs reach 68pc of rental income.
Some current basic-rate taxpayers will also be hit, because the change will push them into the higher-rate tax bracket.
Broker and arrangement fees are currently tax deductible and can be claimed back in the year you arranged a mortgage. However this is also likely to be restricted when the changes to mortgage interest relief come into effect.
– Buy-to-let rental calculator: How much rent should I charge?
– Buy-to-let mortgage calculator: How much can I borrow?
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.
Nimesh Shah, a partner at accountancy firm Blick Rothenberg, said to always keep receipts and other proof of payments. “If HMRC decides to raise an inquiry it will want to see written proof of all the costs you have claimed.”