What expenses can a landlord offset against tax
It is important to understand the latest tax changes. What are the expenses you can offset against tax?
Before claiming an expense, you need to make sure it meets a number of qualifying criteria, including the following:
- The expense must be ‘wholly and exclusively for the purposes of renting out the property’.
- The expense must be revenue, rather than a capital expense.
- And the expense for replacing items must be for a like-for-like replacement, not an improvement.
The most common types of expenses you can deduct are:
- This is for the everyday repairs of a property.
- This covers painting and redecorating between tenancies, replacing carpets and updating kitchens and bathrooms.
- Advertising for tenants. This covers fees incurred in finding new tenants.
- Management expenses
The biggest mistakes landlords make
HMRC has a list of points that will be checked on the landlord tax return, so make sure accounts and returns comply to minimise the chance of a costly and time-consuming tax enquiry.
Know the distinction between capital and revenue expense
Capital works on rented properties, such as extensions or a remodelled bathroom, cannot be offset against tax because these kinds of works fall into the category of capital expense, rather than revenue expense.
You need to divide your rental income equally as a married couple
If the property is in joint ownership, some married couples make the mistake of dividing the income so that the partner in the lower-income tax bracket takes the lion’s share of the income.
If you buy a run-down property and spend money on essential repairs with the intention of letting it, you cannot offset this against tax. And if the landlord incurs expenses prior to renting out the property, these do not count as allowable expenses.
Capital gains tax
In light of the recent tax changes many landlords have said they will be selling some or all of their properties. If that includes you, check capital gains tax has been appropriately calculated.
What changes are on the way?
Landlords will only be able to claim tax relief on 75 percent of their mortgage interest from 6 April 2018. You will receive a 20 percent tax credit on the rest of your mortgage interest payments. Mortgage relief is gradually being phased out, so from the following year the relief will only be available on half of the interest.
From the 2020/21 tax year, a tax credit equal to the basic rate of tax (20%) will replace the mortgage interest tax relief. For a higher-rate taxpayer, the tax credit is roughly half as generous.
But the change could prove more punishing still, as it forces landlords to declare a higher income – potentially pushing landlords into a higher tax bracket. This threatens to wipe out profits for higher-rate taxpayers, and could mean some basic-rate taxpayers are also pushed into the higher band.