Property tax is a complicated business. A lot depends on how you own, let and manage the property; when and how you choose to take income or release capital; your own personal and financial circumstances – and many tax questions don’t have a straightforward answer.
The following is general tax advice and should be taken as a guide only; it is essential to consult a professional property tax specialist to ensure you have the right advice for your own personal situation.
- If you’re doing up a Buy to Let, take advice beforehand to determine whether repair and renovation costs are classed as ‘capital’ or ‘revenue’. The difference in treatment is that capital costs are claimed at the point of sale to reduce capital gains tax, whereas revenue costs may be claimed against rental income to reduce income tax. Typical revenue repairs are things like redecoration costs and replacing a broken boiler with like-for-like, and typical capital costs may include adding a conservatory or en-suite
- Keep all receipts for anything to do with your let and pass them on to your bookkeeper or accountant – you might find things you didn’t know were tax-deductible actually are
- Remember you may be eligible to claim costs prior to actually letting your property to tenants. Under the pre-letting expenditure rules, you could go back up to 7 years, treating the costs as if they were incurred on the day letting commenced. (As per point 1, care must be taken as to whether costs are classified as capital or revenue.)
- Most fees and charges from ourselves as letting and managing agent are tax-deductible, which effectively reduces the cost of our services for you
- If you run your Buy to Let business from home, you may be able to claim for a proportion of your household and utility costs
- Mileage costs for journeys relating purely to your property investment are usually an allowable expense on your tax return. If we are managing your property, the journey start point is our address, not your own home address
- Section 24 (the restriction of relief for finance costs to the basic rate of Income Tax) is causing issues for landlords with mortgages. The concept remains that you must only use the interest and finance costs element as part of the new calculation – never the capital element
- Don’t forget the far-reaching consequences of Section 24. If your taxable rental profits have been inflated, it could affect your child benefit, along with tax credits and student loan deductions. Make sure you take professional advice to mitigate the negative effect on your income
- Consider including a gift aid declaration on your tax return for any charity donations you’ve made – particularly if you’re a higher-rate taxpayer, as it delays the point at which you start to pay tax at 40%
- If there is a major change in your tax return compared to the previous year, make use of the ‘notes’ section to explain any big variances, as it could help mitigate future problems
And a final word on the hot topic of 2019: should you operate your property business through a limited company? Again, there is no easy answer, as there is no one-size-fits-all solution. Potential benefits include: the lower rate of tax, not being affected by Section 24 and potential inheritance tax benefits in the future. But there are potential downsides, such as the tax implications of withdrawing profits, loss of exemptions and allowances you may have received owning in a personal capacity, and a more limited range of mortgage products.
A property tax specialist will be able to help you reach the right decision on the best way for you to buy, own, let and take income from property so that you mitigate your tax liability and stay on the right side of HM Revenue & Custom's rules.
If you would to discuss any of the points raised above get in touch: