Property tax questions answered (Part 1 of 10)

1. What expenses can I offset against rental income?

Question: I have just purchased my first buy-to-let property and have managed to successfully let it out. However, I am unsure as to what expenses I can offset against my rental income.

Answer: Remember the golden rule: If you have incurred a revenue expense for the purpose of your property, then you can offset it against the rental income.

This means that you can continue to lower your tax bill – legitimately. Most investors are aware that they can offset mortgage interest, insurance costs, rates, costs of decorating/repairs, wages and costs of services. Note new rules for mortgage interest from 6 April 2017.

However, so many investors fail to claim the following costs, which when added together can provide a significant tax saving:

• Costs incurred when travelling back-and-to the investment property.
• Advertisement costs.
• Telephone calls made (or text messages sent) in connection with the property.
• Cost of safety certificates.
• Cost of bank charges (i.e. overdraft). But note new rules from 6 April 2017.
• Advisory fees e.g. legal and accountancy.
• Subscription to property investment related magazines, products and services.

2. Switch property with your spouse

 Question: My husband works full-time and I have the more difficult job of looking after the home and children yet receive no income. Would it be better for me to own the property in my name?

Answer: If you have a spouse who is a lower rate (or even nil rate) taxpayer and you are a higher rate taxpayer, then consider moving the greater portion of the property ownership into their name. This means that a greater part of the profit will be attributed to the lower (or nil rate) taxpayer thus meaning that any tax liability could be significantly reduced.

This is a very powerful strategy if your spouse does not work, as any tax liability can be legitimately wiped out. Please note that in order to use this strategy you partner must be trustworthy as legally they will ‘own’ a greater share of the property.

3. Can I offset property losses against other income?

Question: I have bought a property to let out and it is possible that in the first, and perhaps the second, year I will make a loss after accounting for insurances, mortgage interest and loan interest used to get a deposit. Can I offset that loss against my earnings from employment during the same period? If so which IR form do I need to use?

Answer: The answer is ‘no’. The losses cannot be offset against your employment income. However, they can be carried forward and offset against future rental income profits that are generated from the property business.

If you have been making losses, then it is important that you register those losses with the HMRC. The reason for this is because any losses can be carried forward and offset against future profits. For example, if in one tax year you made a £1,000 loss and then the following year you made a £1,000 profit, there is no tax liability as the £1,000 loss has been carried forward and wipes out your future gain!

However, if you have any other properties that are being rented out in the same tax year at a profit, then the loss from the loss-making property can be set off against the profit from the profit-making property.

4. Can I offset the cost of buying a vehicle?

Question: Is it possible to offset the cost of buying a vehicle for use in your letting business, and if so, what would be the best way of doing this?

Answer: Here is a quote from the Revenue manuals page PIM2220:

Capital expenditure on providing the means to travel (usually a car or van) isn’t deductible in computing rental business profits; nor is a depreciation charge. But plant and machinery capital allowances may be available. These allowances are deducted in computing the business profit or loss. The wholly and exclusively’ rule applies to these allowances but, as with revenue expenditure, the landlord can claim the business proportion of the allowances. Plant and machinery allowances on cars costing more than £12,000 are also further restricted.

5. Can we merge our portfolio and split the income?

Question: My Partner (life) and I operate 3 BTL’s. She owns 1 and we jointly own 2.

When completing tax-returns can we merge all 3 and split 50/50?

Answer: If the first property is solely in her name and not in joint ownership, it cannot be merged with the other two properties and must be attributed only to her. The remaining two properties, assuming they are 50-50 owned, can be split 50-50 for income tax purposes.

6. How do I handle general portfolio costs?

Question: I have a number of properties but some costs are generic and cannot be attributed to a single property. Is it possible to offset a cost against a single property or do I need to apportion them? For example, I purchased some decoration materials for painting and decorating two of my properties. Can I just offset the cost against one property?

Answer: In any tax year, all income and expenses from all the properties owned and rented out by a landlord operating a Schedule A property rental business are amalgamated and combined into one single account – for tax purposes. So, the answer to your question is that as long as the cost is attributed to the correct tax year in which it occurred, it doesn’t make a difference which property it was for.

7. Can I claim my costs ror re-mortgaging?

Question: I have heard that mortgage broker and mortgage lender fees are of a revenue nature and valuation costs are of a capital nature. Is this also true if an investment property is re-mortgaged? I am about to re-mortgage an investment property with a different lender and will incur these costs again, but am unsure if I can claim relief against them.

Answer: The answer is that it depends on the status of the interest on the loan. If the interest on the loan is an allowable expense, the cost of obtaining the loan is also an allowable expense. So, in this particular instance, because the loan that is being re-mortgaged is for the purpose of the property then once again the costs can be offset. See HMRC Business Income Manual page BIM45815 (no.8 in the list).

Again, the mortgage broker and mortgage lender fees will be claimed against your rental income, and the valuation costs will be claimed once you decide to sell the property.

Case Study:

John has a buy-to-let mortgage with an outstanding amount of £50,000. He is currently repaying £450 per calendar month back to the bank. However, he realizes that another lender has a special reduced interest rate, so if he re-mortgages with them his monthly rate will be reduced to £400.

He re-mortgages the property and incurs costs as follows:

Mortgage broker fees £250

Mortgage lender fees £200

Survey costs £200

This means he can offset £450 against his annual rental income and can claim the survey costs when he decides to sell the property.

8. Do I need to keep receipts?

Question: Do you have to have receipts in order to claim property related expenditures? What happens if you do not have a receipt or have lost them?

Answer: If you know in your heart that you did spend the money on an allowable expense, then you can claim it. However, if the HMRC question you about it and you cannot prove it, then you must be prepared for the HMRC to say to you: ‘We don’t believe you and therefore we are not accepting what you say’.

Thus, although you are allowed to claim it because you know it is true, you must be prepared to pay the tax on it if questioned about it whilst being unable to prove it.