5 WAYS TO SLASH TAX
Arthur Weller and Amer Siddiq of Property Tax Portal have kindly put together this article to outline five potentially simple ways for buy-to-let investors to reduce their income tax liabilities.
For those landlords that want an easy FREE way to keep track of their income tax liability. Remember that Property Hawk’s Property Manager calculates your income tax bill automatically. All you need to do is copy the figures onto your annual tax return.
1. Look to claim costs as ‘Revenue’ costs
If you can claim large costs as ‘revenue’ costs rather than ‘capital’ costs then you can reduce your annual property income tax bill in a big way.
Sometimes it is easy to determine whether a cost is of a capital nature or not. For example, if you have had a new conservatory built, or even a new bedroom added, then this is clearly a capital expense. This is because it has increased the value of the property.
However sometimes distinguishing between the two costs is not so clear.
Consider the replacement of windows. If you currently have rotten single glazed windows then you will be able to replace them with UPVC double glazed windows and offset the entire cost against the rental income. There will be no need to class this as a ‘capital cost’.
This is because it is generally accepted that the standard windows used in modern properties are UPVC and not wooden single glazed windows. So you are replacing the current standard window fitting with a like-for-like window.
Remember: If you can class a cost as a ‘revenue’ cost then it will improve your cash-flow as you will pay less property income tax.
2. Claim tax relief on ALL revenue expenditures
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, cost of decorating/repairs, wages and costs of services.
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)
- Advisory fees e.g. legal and accountancy
- Subscription to property investment related magazines, products and services
For expert advice on how to cut your tax bill have a look at our dedicated taxation bookshop
3. Make sure you register any rental losses
We cannot stress this point enough.
The generally low rental yields on buy-to-let investment properties purchased over the past few years has meant that an increasing number of people have been making an annual rental loss.
By registering these losses with the Inland Revenue you will be able to take these losses forward and offset them against future profits. Given that the past few months has seen a rise in rental yields, there is a strong likelihood that your investments will now be starting to return an annual profit.
Therefore by having registered your previous years losses you will be reducing your tax liability going forward.
Although it is not a compulsory requirement to register your losses with the Inland Revenue, it will work to your advantage and most importantly will save you tax.
4. Switch property ownership with your spouse if they are lower rate taxpayers
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.
Taxation Solutions for individual expert advice on your property tax matters.
5. Mix and match the 10% wear and tear allowance
If you are offering a fully furnished property then it may be tax beneficial to use the 10% wear and tear allowance.
This is because you can start to claim the relief as soon as you start to receive income from the property.
If you have purchased a property in the last twelve months and have fully furnished it then you MUST consider the costs incurred for furnishing the property.
If the cost was high, then it may be better to start using the 10% wear and tear allowance.
This is because:
You will be providing high-quality furnishings and will not expect to replace them for a good few years, i.e., 5-7 years.
Therefore by claiming the 10% wear and tear allowance you will be able to start claiming the relief immediately. This means that upto 10% of your rental income will be deducted
If you do not claim the allowance then you will be using the ‘renewals’ basis method, which will not be used until you replace the furnishings. So, for example if you spend £7,500 furnishing a brand new property before you let it then none of this cost can be offset against your income until it is replaced, which could be 5-7 years in the future.
If you decide to sell the property before you renew the furnishings, then by using the ‘renewal basis,’ you will not have managed to offset any renewals cost at all against your property.
This means that you will have incurred unnecessary taxes!
However, if you use the ‘10% wear and tear allowance,’ then you can claim this from the date you purchased the property.
Also, if you have purchased a property that includes furniture and furnishings then again it will be beneficial to claim the allowance.
About the authors
Arthur Weller and Amer Siddiq are contributors to Property Tax Portal, with whose kind permission the above article is published.
For more information on tax including details on how to calculate your capital gains liability have a look in the Landlords Bible
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