With the changes made in the government’s property tax laws announced in the summer 2015 budget buy to let taxation was a hot topic where landlords were facing the prospect of greatly reduced profit margins with the rental of property in the UK
Chancellor George Osbourne, in his Budget speech, announced that the planned real estate law amendments would indeed impact negatively on landlord’s rental property profits.
So how do the amendments affect landlords and what expenses are eligible to be claimed back through tax relief on buy to let property?
Under the new law, rental property owners will not be eligible to deduct most of the capital expenses from their tax income. However, there are many other costs that the landlords can still claim for.
Here are some buy to let tips that rental property owners can use to increase the profit margin on their rental income.
Currently, the buy to let taxation law provides a loophole for landlords to use their annual mortgage loan interest to offset their tax bill. Therefore, you are eligible to claim relief at your personal income tax rate.
However, with the planned amendments taking effect, this tax relief may change. This means that landlords will pay tax based on the rent they receive from their rental property rather than on the amount left after deducting the mortgage interest from the tax income.
Unfortunately, in some cases, implementation of such reforms will result in payments exceeding 100 percent of rental income profits as taxes. Besides, these taxes will be way above what the landlords ought to be paying.
Even though the government will permit a 20 percent tax relief comparable to basic rate tax on the interest, the tax credit equivalent will do little to counterbalance the amplified cost.
This tax increase on rental property is expected to be phased in from 2017 and fully implemented by 2020.
According to Smith and Williamson, landlords whose mortgage interest is about 75 percent or more of their net rental income will see all of their income wiped out by 2020. In addition, Landlords whose mortgage interest is about 45 percent of their net rental property will have their investment income wiped out by tax if the mortgage interest reaches 68 percent of net rental income.
The tax law amendment will also hit the current basic-rate taxpayer since the law will push them into a higher tax bracket.
Currently, you are eligible to deduct any arrangement and broker fees from your taxable rental income. However, the eligibility is likely to change with the implementation of the changes in mortgage interest relief. Nevertheless, you can still claim back these mortgage fees to increase your profit margin as long as the law still provides for it.
If you opt to manage and look for tenants for your property on your own, you will be eligible to make a claim for the costs incurred associated with advertising for tenants, credit checking, purchasing a tenancy agreement, referencing, professional inventory and deposit protection. The National Landlord Association estimates this value to be more than €300.
In case you choose to hire the services of an agent to manage your rental property, you will have to pay the agent something, usually between 10 and 15 percent of your rental income. However, you will be able to claim back this cost from your taxable income thereby broadening your profit margin.
Specialist landlord insurance covers rental building as well as any income losses that may be incurred during a tax year. Therefore, the costs of taking up home emergency, contents cover, rent guarantee and legal expenses insurance is not only deductible from the tax income but also cushions the landlord from any possible losses. Insurance cover for a low-risk rental property costs about €200 per annum.
While the costs of renovation, improvements that add value to the rental property and extension costs are not tax deductible, you can claim back any money that you use for keeping your property in a good state of repair.
The costs of repair may include broken furniture repair, painting, mending broken doors and windows, and replacing, fixing or decorating the roof.
Buy to let tax relief on furniture – According to the new regulation, you can either choose to claim back the exact cost of replacing individual furniture, or claim for a general wear and tear allowance on a rental property that is furnished.
You will be eligible to claim 10 percent of the annual rental income minus the costs that you incur on behalf of the tenant such as the council tax if you choose to claim back the wear and tear allowance. To claim the allowance, you should not spend any amount in replacing the furniture in a given fiscal year.
Alternatively, you will be eligible to claim back the cost of individual furniture in your furnished property. However, this only applies to the furniture that already exists.
From April 2016, landlords will only be eligible to deduct their actual expenditure. Therefore, you will not be able to claim back any money if you don’t actually incur any expense on correcting the wear and tear.
In cases where landlords are leaseholders, they become subject to paying ground rent. In addition, they will also have to pay for service charges that tend to vary considerably and are most common in blocks of flats.
These service charges may include the costs of maintenance, cleaning, lighting for common areas, heating and even security.
Landlords are eligible to claim back these charges plus the costs of other on-site services such as electrical and gardening costs.
You are eligible to claim back the costs you incur on behalf of the tenant such as council tax or any utility bill. What’s more, you can still claim these costs during the void periods when there is no tenant in your rentals property.
You can make a claim for other direct costs associated with letting the property such as stationary, phone calls and the cost of travelling as part of the rental business.
The law requires every landlord to submit a self-assessment tax return every fiscal year. If you decide to hire the services of an accountant to prepare this self-assessment tax return, the accountant fees will be tax deductible. However, you should note that it is paramount to keep your receipts as a proof of your incurred expenses.
“The buy to let taxation information on this site is provided for information purposes only. The Information is not intended to be and does not constitute financial advice or any other advice.”
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