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Landlord Tax Deductions: A Guide
Naturally, it is the aspiration of all landlords to forge a prosperous property portfolio, seeing multiple rentals yielding high returns. However this does pose the problem of making the landlord liable for significantly higher tax payments, something they would be keen to minimise their exposure to. Whilst many landlords will be painfully aware of the exorbitant costs of establishing a rental property, finding tenants and maintaining the investment, far fewer have an understanding of how they can minimise the landlord tax they are required to pay.
- How Much Tax Do Landlords Pay?
- Income Tax for Landlords
- Stamp Duty for Landlords
- Council Tax for Landlords
- Capital Gains Tax for Landlords
- How Can a Landlord Pay Less Tax?
- Make All Possible Landlord Tax Deductions
- What Expenses Can I Deduct From Rental Income?
- Should Landlords Incorporate?
- Replacement of Domestic Items Relief
- Capital Expenditure
- Capital Allowances
How Much Tax Do Landlords Pay?
Whilst the amount that a landlord will pay in tax on their rental income will be dependent on the specific tax band they fall into, there are numerous other taxes a rental property owner should be aware of.
Income Tax for Landlords
It goes without saying that the specific amount a rental owner can expect to pay in landlord tax will vary drastically between properties. Regardless of this a landlord will be legally obligated to pay tax on their rental income. With this being said if the amount a landlord charges their tenants each year in rent is lower than £1000 they will not be required to complete a self-assessment tax return.
As can be expected rental income is largely comprised of exactly that, periodic payments made to the landlord by the occupants of the rental property. However, there are a number of other fees that could be attributed if the landlord charges the tenants for cleaning in a HMO, or repairs to the property.
Stamp Duty for Landlords
Whilst the current stamp duty rates are set to be revised in June 2021, during the current stamp duty holiday, if a landlord purchases a buy to let property that is valued at less than £500,000 a rate of 3% on stamp duty will have to be paid. For properties valued within the next £425,000, essentially up to £925,000, landlords will be required to pay a stamp duty rate of 8%. From there is the rental is values up to £1.5 million a stamp duty rate of 13% is applied, with anything over this amount coming with a 15% payable rate.
Council Tax for Landlords
Whilst in most cases the landlord will not be responsible for the council tax, passing this onto the tenants through the terms of the tenancy agreement. However, it is essential for rental property owners to remember that this is not the case if the accommodation they provide contains multiple tenants, each with their own tenancy agreement, such as student housing or a house in multiple occupation. Additionally if the property is vacant not only is the landlord unable to depend on regular rental payments, but they will also be held liable for any upcoming council tax payments. However, whilst the landlord will still have to make these council tax payments, they can be heavily discounted if the property is unoccupied, with a further reduction if the property is also unfurnished.
Capital Gains Tax for Landlords
Capital gains tax is the amount a landlord can expect to pay on the profit they make from selling their rental properties. Whilst the specific amount of allowance a landlord is given before any capital gains tax must be paid changes each year, this threshold is currently established at £12,300. Once this amount has been deducted from the profits realised through the sale of the property a taxable rate of 18% for basic rate payers and 28 for additional rate payers is applied, with the remaining amount being retained by the landlord as the actual amount they take away from the sale. Once the rental; property has been sold the landlord will be required to pay the appropriate amount of capital gains tax within 30 days.
How Can a Landlord Pay Less Tax?
Much to the dismay of landlords, overseeing a rental property portfolio can come with a seemingly endless list of expenses. However, rental property owners can take solace in knowing there are many initiatives they can take advantage of to lower the amount of landlord tax they will have to pay.
Make All Possible Landlord Tax Deductions
Whilst this may initially seem like something all landlords do, it is surprising the amount of claims that could still be made, resulting in significant reductions in landlord tax. It is essential to keep in mind that if the purchase was made with the intent of generating revenue for the letting business, it can be claimed as a tax deduction. As can be expected, if a landlord chooses to make a claim for a purchase it t is imperative that they have documented the purchase through receipts and records of the expenses that they incur.
What Expenses Can I Deduct From Rental Income?
As mentioned there are a number of deductions a landlord is able to make to drastically reduce the amount of tax they are required to pay. The expenses that a landlord chooses to submit a claim for against their tax payment should have been incurred wholly and exclusively through letting out a rental property. These costs incurred through managing a rental property can comprise travelling expenses, allowing the landlord to claim for the mileage they travel to carry out inspections and in-person property viewings. Further deductions can be made for any legal fees the landlord is exposed to when renewing a lease or shorthold tenancy, evicting a problem tenant, rent collection services, accountancy fees and any other costs associated with property management services. Any repair work that has been conducted on the rental property can also be claimed against landlord tax, however it is important to note that this work can not result in any changes intended to improve the value of the property, simply remedial work. If the landlord is liable for the cost of these services they are also able to submit a claim for the gas, electricity and water rates charged for the rental.
Should Landlords Incorporate?
Whilst this may not be an immediate solution for all landlords, the recent movement of landlords looking to incorporate over recent times has been undeniable. Once of the incentives seeing so many make the move is of course, the tax relief. Incorporated landlords are subject to corporation tax rates set at 19%. Whilst this is subject to increase in 2023, seeing earning of over £250,000 pay a rate of 25%. When compared to the tiered system of person taxpayers at 20%, 40% and 45%, to the benefits for landlords with an extensive property portfolio become much clearer, allowing them to retain a far greater portion of their rental income. As a company the landlord will also be able to make deductions in regards to the mortgage interest payments.
It is also worth noting that if there were to be any unfortunate event that resulted in the injury of tenants or guests in the property, or structural damage to the rental the landlord would not be held liable as this would fall on the shoulders of the limited company.
Replacement of Domestic Items Relief
Replacing the Wear and Tear allowance landlords received for furnished properties, the new initiative was introduced in April 2016. The move allows landlords to continue to offset the costs of any wear and tear found throughout e rental property. Naturally, through the nature of wear and tear many of the items that are being replaced may be out dated by the time a replacement needs to be found. With this in mind the costs associated with replacing the item is limited to the same price of the item’s more modern counterpart. This also prevents landlords from using the relief to improve the furnishings contained within the property, with anything that needs to be replaced having to be exchanged for a “like for like” replacement. Our course landlords will likely incur an extra cost when trying to dispose of the out dated appliance of furnishing, therefore deductions can also be made to offset the costs that come with this process. However, if any amount is given to the rental property owner in cash, or the equivalent, when disposing of old furnishings, this amount must be taken into account, appropriately reducing the amount a landlord is able to deduct from their annual tax payment.
Encompassing bed, carpets, curtains, white goods and appliances, sofas and other furnishings, it is essential that landlords keep in mind that the only applicable deductible items are intended for the sole use of the rental’s occupants. Additionally, whilst the previous regulations on what a landlord was able to claim for regarding wear and tear granted them with a 10% allowance, the replacement of domestic items relief applies to fully and partly furnished properties, alongside unfurnished; however if this is the first time furnishing a property a landlord cannot claim for these items as they have not been subject to wear and tear through use by tenants. It is worth keeping in mind that whilst this could save property owners a significant amount in their landlord tax, they will be unable to offset these costs if rent a room relief is also being claimed.
Whilst it may be difficult, it is crucial that landlords distinguish between capital and revenue expenditure, as the later cannot be claimed against the income the landlord receives from letting out their property. Essentially however, capital expenditure is considered to be any investment made with the intention of improving the rental property and in turn significantly increasing its value. Admittedly this does muddy the water somewhat in regards to repairing the property, however, another deemed above a “like for like” and contributes to an increase in the capital yield upon the sale of the property would be considered to be a capital expense, allowing for a deduction against capital gains landlord tax. Naturally, if a landlord purchases a property that in need of significant work in order to make it habitable and safe for occupancy, these costs would also be considered a capital expense. It is also essential for landlords to consider if the expense in question passes the “wholly and exclusively rule; demanding that any capital expense claimed for against landlord tax must exclusively apply to the property business.
Another way in which rental property owners are able to reduce the amount they pay on landlord tax is through capital allowances; although it is essential to note that these do not apply to residential properties, aside from furnished holiday lets. These capital allowances allow a landlord to take advantage of a tax relief granting them deductions on any tools, equipment and other costs they incur through managing their portfolio. However, this does differ from the general deductions for business expenses; each item that the landlord chooses to claim for will be evaluated individually by HMRC. Typical examples of what a rental owner could claim for include; electrical, water and heating systems, storage equipment, alarms, and white goods such as washing machines, cookers and refrigerators. There is currently an annual investment allowance allowing deductions from landlord tax of up to £1,000,000 until the 31st December 2021; after this point the allowance will be dramatically reduced to £200,000
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