It is becoming more difficult to be an occasional landlord, especially in the UK. Many landlords in the UK end up paying more tax than they need to.
If you are a property investor and you don’t take full advantage of your allowable expenses, you are missing out. Here’s our tax quick Guide to investing UK.
This post is for general guidance only, none of the information should be construed as tax advice. We are not accountants; you should always seek professional advice before making any decisions.
This post is written for those who own rental properties in their personal name. If you own your rental properties in a company, you will be entitled to additional deductible expenses.
Guide to investing UK – How to calculate your taxable income
Even if you own many UK properties, you should regard all costs as part of one business to determine your profit or loss by:
- Work out your income by adding all your rental income together
- Work out your costs by adding all your permissible expenditures together
- Subtract costs from the income
If you live in the UK, your annual income from your job, self-employment, pensions, and any allowable deductions will determine your tax rate.
The fees and expenses you incur when you buy a rental property are considered part of the purchase price. They cannot be deducted from the rental income. However, when you sell the property, you can subtract these costs from the gain (or add them to the loss) on your capital gains tax (CGT) liability. To claim CGT Relief for these expenses when you sell, you need to record and maintain supporting receipts. These include:
- Stamp Duty (SDLT)
- Legal Fees
- Building survey charges
- Independent inspection charges
- Auctioneer’s costs (if the property was purchased at auction)
Your conveyancer’s completion statement should contain most of these costs.
(You may also be interested to check out our article on UK Inheritance tax here.)
In general, all expenses must be made claimed in full, from the rental income in the year it is incurred. These expenses include the following.
Finance costs include the interest and arrangement fees on any loans taken out to buy or improve the rental property and any bank fees on a separate property bank account. If the mortgage is a principal and interest mortgage, just the interest component—and not the entire repayments—counts as financial charges.
Interest expenses if property is owned in a company
Loan expenses are fully deductible residential properties owned by companies.
Interest expenses if property is in a personal name
From April 6, 2020, only 20% of the financing costs for residential properties owned by individuals may be deducted from the tax liability on the net rental income after all other expenses and losses carried forward but before any finance charges. The restriction was phased in over three years prior to April 6, 2020.
It can be relatively complex for people to understand this. Here is an example, consider a scenario where a person who lives in the UK and earns their principal income in the UK and is paying higher rate tax at 45%. They own a rental property with the following situation:
- Gross rental £10,000 p.a.
- Deductible expense £1,000 p.a.
- Interest £2,500 p.a.
|Actual Profit (£)||Taxable Profit (£)|
|Net Rental Profit||6,500||9,000|
|Tax @ 45%||4,050|
|less interest relief on 20% of £2,500||500|
|Net tax liability on rental income||3,050|
As you can see, the investor is paying an effective tax rate of 46.9%. If a landlord is heavily leveraged, their tax obligation may well exceed their net income.
Because of these new tax rules, investors must carefully consider their investment objectives. UK-domiciled investors may want to consider the following:
- Capital appreciation – if investors are not purchasing principally for capital appreciation, this might not be the right investment strategy
- Purchase in a company – it may make more sense to purchase the property in a company. However, there is no guarantee the rules for a company to offset their entire tax income remain forever.
- Buy offshore – it might make sense for investors who live in the UK to purchase offshore, where their investment may be more tax efficient.
When calculating your taxable rental profit, landlords may deduct expenses from their rental income if they are used solely and exclusively for renting out the property. These include items such as:
- General maintenance and repairs to the property, but not improvements (such as replacing a laminate kitchen worktop with a granite worktop)
- Water rates, council tax, gas and electricity
- Insurance, such as landlords’ policies for buildings, contents and public liability
- Costs of services, including the wages of gardeners and cleaners
- Letting agent fees and management fees
- Legal fees for lets of a year or less, or for renewing a lease for less than 50 years
- Accountant’s fees
- Rents (if you’re sub-letting), ground rents and service charges
- Direct costs such as phone calls, stationery and advertising for new tenants
- Vehicle running costs (only the proportion used for your rental business) including mileage rate deductions for business motoring costs
Expenses landlords cannot claim a deduction for include:
- Private telephone calls – you can only claim for the cost of calls relating to your property rental business
- Personal expenses – you cannot claim for any expense that was not incurred solely for your property rental business
Maintenance and repair expenses
The costs of upkeep and repairs to the property are considered allowable expenses (but not “capital” improvements). An asset is put back in working order after a repair, sometimes by having individual parts replaced. Repairs to real estate may include:
- Repairing storm-damaged roof tiles
- Redecorating the home between tenants to bring it back to its former state, fixing a broken boiler.
If the upgrade is incidental to the repair, such as changing a single-glazed window for a double-glazed window, replacing the damaged area of the property with its closest modern equivalent is still considered a repair.
You can only claim the additional costs you expended for repairs that your insurance does not cover. Assuming you have an insurance policy that pays for some of the cost of repairs to your property.
This is also true if you retain your tenant’s deposit through a Tenancy Deposit Scheme to compensate any property damage they may have caused. Only repair-related expenses that are more than the deposit you maintained can be claimed.
You are not allowed to claim the expense of replacing any equipment or furniture in a property. These are not permissible as maintenance and repair expenses. However starting on April 6, 2016, they might be eligible for relief for replacement domestic items.
If the costs of replacing fixtures like baths, washbasins, or toilets are like-for-like replacements and not improvements, they are typically acceptable as they are considered repairs to the structure.
It is also acceptable to cover the cost of replacing little goods like bed linen, cushions, cushions, and tableware. To be eligible, the things must:
- low value
- have a limited functional life
- require constant replacement (almost annually)
Landlords cannot claim capital expenses from rental income, these include items such as, furnishings and equipment that didn’t already exist, as well as changing, upgrading, or adding to what was already there.
Although capital expenses cannot be deducted from your rental income, you should keep track of them. You might be able to use them as a deduction for capital gains tax if you sell the property.
Examples of capital expenditures that are not often authorised include:
- adding an extension
- installing a security system if one did not previously exist
- upgrading a kitchen
Improvements to property before renting it out
Before you lease or rent a property, some costs of maintenance may be capital expenses and not permissible expenses. For example, if you purchase a home that is in poor condition and sold for significantly less because it required refurbishment.
It’s unlikely that any work done to restore it to a condition where it may be rented will be considered a repair. Since they would enhance the property, they will constitute capital works. The expenses for these works won’t be reimbursable.
When renting out many properties, the revenue and expenses from each property should be totalled up to determine the overall profit or loss for the year. As a result, expenses for one property may be offset by profits from another. If one property experiences a loss, it is instantly countered by the revenues of another.
Are you thinking about buying an investment property in the UK?
If you are thinking about buying a property in the UK, you need to make sure you do your homework before you buy. Mistakes made investing in property are very expensive to fix.
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