Buy-to-let landlords have been affected by a series of legislative changes in recent years, from Stamp Duty Land Tax (SDLT) rate hikes to restrictions on mortgage tax relief. So it pays to know where tax-efficiencies still can be achieved.
Whilst the current climate for landlords isn’t as favourable as it once was, there are still tax savings to be made when you know how. Here we explain what expenses you can claim to reduce the tax bill on your rental property.
What can I claim tax relief on?
By 2020, income tax relief for landlords on residential property finance costs will be capped at the basic rate of tax. This includes interest on mortgages, loans and overdrafts used for the purchase or improvement of the let property. Most importantly, only the interest part of your mortgage can be treated as an expense, not the payment as a whole.
Income tax relief may be on the decline, but there are still a number of expenses available to be claimed. These include:
• Costs for maintenance and repairs
• Costs for replacing furniture, furnishings, kitchenware and household appliances
• Council tax, gas and electricity, and water
• Insurance, including landlords’ policies for buildings, contents and public liability
• Fees for letting agents and accountants
• Legal fees for lets of up to a year
What qualifies as a legitimate expense?
But before claiming an expense, you need to make sure it meets a number of qualifying criteria, including:
• 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.
• The expense for replacing items must be for a like-for-like replacement, not an improvement.
Maintenance and repairs
The cost of maintenance and repairs is a relatively straightforward and commonly claimed expense. A repair means restoring an asset back to its original condition. This can sometimes mean replacing items. For example, replacing a broken window or radiator would be classed as an allowable maintenance and repair cost.
Landlords with an insurance policy in place covering the cost of some repairs to their property also need to beware that expenses can only be claimed on additional repairs not covered by their insurance.
Replacement of domestic items relief
‘Replacement of domestic items’ relief replaces the ‘wear and tear’ allowance and is available to all landlords, regardless of whether their property is furnished or not. It applies to moveable furniture, furnishings, kitchenware and household appliances, and allows landlords to claim a deduction against their tax liability equivalent to the cost of the replaced item.
It’s important to remember that this relief is solely for the replacement of domestic items, meaning the initial cost of purchasing an item for a let property isn’t an eligible expense.
Also, if you decide to sell or part-exchange your old item when replacing it with a new item, the additional costs need to be considered. Similarly, you may incur costs when disposing of the old item or acquiring the replacement. This all needs to be factored in when calculating your deduction, or in other words:
The cost of the replacement item + incidental costs of disposing of or acquiring items – any amounts received from disposal of old item = your deduction.
When might I not be able to claim full tax relief?
Remember though, if the replacement item you purchase is a significant upgrade from the original item, you won’t be able to claim the full amount as a tax-free expense. The allowable deduction in this instance is restricted to the cost of purchasing an equivalent item to the original.
For example, say you are claiming replacement of domestic items relief when replacing a fridge. If a new fridge costs £180, but you instead purchase a fridge freezer for £250, the additional £70 that you have spent will not qualify for tax relief.
You may be replacing a particularly old item, in which case you might find it difficult to replace it with a new item that isn’t considered a significant improvement. However, providing it’s a reasonable modern equivalent, the full cost of the item will be tax deductible. For example, the replacement of single glazed windows with new double glazed windows would be considered to be an allowable revenue expense.
Quality property taxation advice from Hillier Hopkins
For further guidance on allowable expenses for rental properties, or for help with any property taxation queries in general, get in touch with Hillier Hopkins today on +44 (0)330 024 3200. We have specialist expertise in property taxation in-house and would be delighted to assist you.