If you’re a landlord with a portfolio of buy-to-let properties, then changes announced in the summer Budget, will significantly increase your tax bills. We are revisiting this topic today, because the changes were so complex that their true impact has only just been completely understood (see the working example at the end of this article).
Some are calling this the death of buy-to-let as landlords have begun off-loading their portfolios already, before the tax increase is phased in from 2017 and fully implemented by 2020.
Understanding what you can claim is key, and will significantly impact landlord’s profits. Get it wrong, and you can say goodbye to any profit altogether. The following guide outlines the expenses you can claim for you buy-to-let property.
Mortgage Fees and Interest
You will no longer be able to deduct the cost of mortgage interest from your rental income. Tax will be applied to the rent received, instead of what is left after paying the mortgage interest. There will be a tax credit equivalent to basic rate tax (20%) on the interest, but this does little to offset the increased cost.
While broker and arrangements fees are currently tax deductible, they are likely to be restricted when the changes are implemented.
Letting Agent Fees and Finding a Tenant
The costs payable to a letting agent such as finding a tenant or managing your property can be claimed back. In addition, if you rent your property privately, you can also claim back your costs for advertising, tenancy agreements, credit checking, referencing, deposit protection and inventory costs.
Your landlord insurance for both buildings and contents is tax deductible, including home emergency, legal costs and rent guarantee insurance.
Maintenance and repairs
Any money you spend on maintaining the property and integral fittings and keeping it in a good state of repair is tax deductible. This could include painting and decorating, repairing roofs and gutters, and integral bathrooms and kitchens. It does not however include extensions or renovations or enhancements, which are deemed as improvements which add value to the property and are used in the Capital Gains Tax computation.
As of 2016, you will only be allowed to deduct costs that you actually incur. So, unlike now if you let furnished accommodation, there will be no 10% allowance.
Ground Rent and Service
You will continue to be able to claim for ground rent and services which are usually charged to leaseholders. This may include cleaning, maintenance to the building and maintaining common areas.
Council Tax and Utility Bills
You can claim the whole cost of any council tax or utility bills that a tenant would normally pay, if you are paying them. This also applies to any void periods.
Other direct costs associated with letting the property which are tax deductible include phone calls, stationary and the costs of travelling between properties for the sole purpose of the rental business. It’s worth noting that more than 14,000 have signed an online petition calling for these measures to be withdrawn.
Working Example (source: Telegraph Money)
Now – A higher rate tax payers buy-to-let earns £20,000 a year and the interest-only mortgage costs £13,000 a year. Tax is due on the difference or profit. So you pay tax on £7,000, meaning £2,800 for HMRC and £4,200 for you. 2020 - Tax is now due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest. So you pay 40pc tax on £20,000 (ie £8,000), less the 20pc credit (20pc of £13,000 = £2,600), meaning £5,400 for HMRC and £1,600 for you. Your tax bill has therefore gone up by 93pc.
Now, say Bank Rate – and in turn your mortgage rate – rises by a small fraction, lifting your mortgage cost to £15,000, while your rent remains at £20,000.
You will have to pay £5,000 tax in this scenario, so you make no profit at all.