Rental income – what expenses can I offset?

The budget of summer 2015 announced changes to the tax relief that buy-to-let landlords can claim that may well affect your rental income long term. Until 2017, landlords can claim back all of their ‘financial costs’ incurred in renting out a property. This even includes mortgage interest.

In 2017, however, changes will come into effect that mean landlords can only claim relief  at the basic income tax rate of 20 per cent, even if they are higher rate taxpayers. If you’re a landlord in one of the higher tax brackets, you could lose over 50 per cent of your tax relief by 2020, when the changes will be completely in effect.

Although it’s tempting to panic about losing rental income, it’s also wise to make sure that you are actually claiming everything you’re entitled to before the changes come in. That way, when the reductions in tax relief hit, there’s some extra income to soften the blow.

Mortgage Interest

From April 2017 over a four-year period implementation of the new claims on relief for finance costs (e.g. mortgage interest rates) incurred on the property of all landlords of residential property in or outside the UK will be phased in as follows:

  • 2017/2018: the deduction from property income will be restricted to 75% of finance costs with the remaining 25% available at the basic rate.
  • 2018/2019: 50% of finance costs available for full tax relief and the remaining 50% available at the basic rate.
  • 2019/2020: 25% of finance costs available for full tax relief and the remaining 75% available at the basic rate.
  • 2020/2021: all financing costs incurred by a landlord will be given as basic rate tax reduction.

The restrictions being imposed on the finance costs are likely to affect landlords of residential properties paying tax at the higher and additional rates, however excluding those with qualifying furnished holiday lets.

Letting agent fees

These are tax-deductible – considering you could be looking at fees of 10-15 per cent of your rental charges for a traditional letting agent, that’s something you need to add into your tax return as an expense.

The costs of

  • advertising
  • drafting tenancy agreements
  • credit checking and referencing tenants
  • deposit protection fees and
  • inventory costs,

can also be offset if you’re not letting through an agent.

Maintenance and repairs

You can’t claim for home improvements or renovation but you can offset the cost of fixing any problems and general maintenance of the property. The type of repairs you can claim for are:

  • interior and exterior painting and decorating
  • treating damp and rot
  • mending broken doors, windows, lifts, furniture and appliances.
  • re-pointing
  • stone cleaning
  • replacing roof slates, flashing and gutters
  • Wear and tear

From April 2016, a new system is replacing the wear and tear allowance. This new system will affect all landlords of furnished residential properties. In the past, the wear and tear allowance allowed landlords to claim back broadly 10 per cent of the annual rent. The new allowance will be a system allowing for landlords of residential property to deduct only the actual costs incurred of replacing furnishings in the tax year. Capital allowances for furnished holiday lets will not be affected.

Council tax and utility bills

If you pay any of the property’s utility bills on the tenant’s behalf, you can claim the whole cost of this back.

You can also claim back one-off costs like the cost of travelling between properties.

If you’re not sure about which expenses you can claim back against tax, ask an accountant’s advice – it’s also tax-deductible!

All data and information provided in this advert is for informational purposes only and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional accountant. Emma Stevens Accountancy Ltd makes no representations as to accuracy, completeness, correctness, suitability, or validity of any information in this ad and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. All information is provided on an as-is basis.