If you’re a landlord, then you will have a number of potential tax liabilities on your rental property. In the latest part of our “52 Ways to Save Tax” guide, we look at how you reduce the amount of income you can pay on your buy to let investment.
52 Ways to Save Tax – Part 26: Claim all the expenses on your ‘buy to let’ property
The income that you receive as rent on investment property is taxable. Unless you are set up as a company, you have to declare any rent that you receive as part of your Self Assessment tax return. The tax is then charged in accordance with your own income tax band:
- 20 per cent for basic rate taxpayers
- 40 per cent for higher rate taxpayers
- 45 per cent for additional rate taxpayers
Bear in mind that adding your rental income to your other earnings may push you into a higher tax band.
You can reduce the amount of tax that you pay by deduction certain allowable expenses from your rental income. These expenses include:
- Council tax and ground rent
- Buildings insurance on the property
- Property repairs and maintenance (although large improvements such as an extension are not income tax deductible)
- Legal, management and lettings agency fees
- Other related property expenses
- Interest on buy to let mortgages (see below)
In 2015, the Government reduced the amount of interest tax relief on buy to let mortgages. These changes come into force in April 2017. Prior to April 2017, tax is payable on your net rental income after deducting allowable expenses including mortgage interest. If you pay higher or additional rate tax you can claim tax relief at your highest rate.
However, from April 2020 tax relief can only be reclaimed at the basic rate, whatever rate of tax you pay. These rules are being phased in over 4 years beginning in April 2017.
Reducing the amount of Capital Gains Tax that you pay
If you sell a buy to let property for more than you paid for it then you may be liable for Capital Gains Tax (CGT).
As well as reducing the amount of tax you pay on your rental income, you can also reduce the amount of Capital Gains Tax you pay when you sell the property. Legitimate ways to reduce your CGT bill include:
- Using your full CGT annual allowance (£11,100 in 2016/17)
- Carrying over a loss made on the sale of a buy to let property in previous years
- Deducting solicitors fees
- Deducting estate agents fees
- Deducting the costs of advertising the property for sale
- Deducting stamp duty
- Deducting any expenditure on ‘capital’ items
There are also certain tax reliefs available. For example if the property was previously your main residence, the gain may be reduced.