It’s no secret that property tax is a complicated business. How much tax you pay depends on a whole host of things, including:
- how you own, let and manage the property
- when and how you take income or release capital
- your own personal, employment and financial circumstances
…and many tax questions don’t have a straightforward answer.
As always, any general advice should be taken as a guide and you must consult a professional property tax specialist to ensure you have the right advice for your own personal situation.
- Doing up a buy to let? Make sure you know which repair and renovation costs are classed as ‘capital’ (e.g. adding a conservatory or en-suite) and which are ‘revenue’ (e.g. redecoration costs and replacing a broken boiler with like-for-like). The difference is that capital costs are claimed at the point you sell, to reduce capital gains tax, whereas revenue costs may be claimed against rental income to reduce income tax.
- Keep all your receipts. You might not think something’s tax-deductible when it actually is. So pass all receipts on to your bookkeeper or accountant and let them do their job.
- You might be able to claim costs from before you actually let your property to tenants. Under 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. (Again, take care as to whether costs are classified as capital or revenue.)
- Agent fees might not cost you as much as you think because most fees and charges from your letting and managing agent are tax-deductible, effectively reducing the net cost you pay for the service.
- Do you run your buy to let business from home? You may be able to claim for a proportion of your household and utility costs.
- Remember to calculate mileage. Mileage costs for journeys relating purely to your property investment are usually an allowable expense. But if you have a managing agent, the journey start point is their address, not your own home address.
- Section 24 (the restriction of relief for finance costs to the basic rate of Income Tax) is already 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 – not the capital element.
- Don’t forget the wider consequences of Section 24. If your taxable rental profits have gone up, that could have a knock-on effect on your child benefit, tax credits and student loan deductions. Take professional advice to mitigate the negative effect on your income.
- Remember Gift Aid. Declare all your charity donations on your tax return – particularly if you’re a higher-rate taxpayer, as it delays the point at which you start to pay tax at 40%. Good for the charities & good for you.
- If there’s a major change in your tax return compared to the previous year, use of the ‘notes’ section to explain any big variances - it could help mitigate future problems.
Finally, an extra note about the hot topic of 2019: should you operate your property business through a limited company? Again, there’s no easy answer and no one-size-fits-all solution. Potential benefits: the lower rate of tax, not being affected by Section 24 and potential inheritance tax benefits in the future. Potential downsides: 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.
Speak to a property tax specialist, who can help you reach the right decision on the best way for you to buy, own, let and take income from property. Good advice will help you mitigate your tax liability and understand the rules applied by HM Revenue and Customs.