Make use of little-known expenses
Landlords can claim back the cost of maintaining and running a property by deducting these costs from their rental income when filing a tax return.
Qualifying expenses include insurance, letting agent fees and payments to cleaners and gardeners.
But they also include less tangible expenses, such as the cost of travelling between their rental properties and phone calls or texts sent in connection with a property.
Those with a monthly contract can expense only the proportion of time they use it for business purposes. It is also possible to claim back the cost of subscriptions to property investment magazines and legal and accountancy fees connected to the buy-to-let.
They may seem small in isolation, but deducting these kinds of expenses from your income can make a big difference. Zena Hanks of Saffery Champness, an accountancy firm, said: “With increasing mortgage interest costs, the need for landlords to control spending and record expenses is more important than ever.
“It may seem like a hassle to keep track of these small expenses, but doing so will make HMRC much more likely to accept them. It’s important to remember that offset expenditure must be wholly and exclusively for the purpose of the business.”
Be aware that repairing a property does not include making improvements – such as replacing a laminate flooring with better quality wood – and these expenses cannot be deducted.
Ms Hanks added: “The expense needs to be revenue in nature, and not capital, to make sure it is deductible against the rental income.
“Typical revenue expenses include utility bills – but the costs of, say, building an extension on the side of a property would be treated as a capital expense and not allowed as a deduction against rental income.”
Property allowance
Landlords can claim a property allowance worth £1,000 each year in tax-free rental income. If you own a buy-to-let property with someone else, such as a spouse, you can each claim the £1,000 allowance.
However, you cannot claim both the property allowance and rental expenses – you must choose one or the other.
So if your rental expenses for the year are less than £1,000, it would be worth claiming the property allowance (you will also not have to provide any receipts). But if they are more, you could be losing out on relief by opting for the £1,000 allowance.
If you earn less than £1,000 a year in rental income, the entire amount will be tax-free and you will not have to contact HMRC. But anything over this threshold will need to be declared and you need to actively claim any allowances.
Rent a Room scheme
Homeowners who let out a furnished room in their main home qualify for an automatic £7,500 tax-free allowance on any rental income (tenants can also use the scheme if they rent out a room to a lodger). If the income is shared jointly, the allowance is halved to £3,750 each.
If you are planning to welcome a tenant into your main home and have a residential mortgage, then be sure to ask permission from your lender first. Not keeping the bank informed can have disastrous consequences, as is explained here.
