07/09/2023
What Costs Can Landlords Offset Against Tax?
Are you making the most of tax-deductible costs? Private landlords can significantly reduce their tax bill by utilising these deductions. They are there for you to use, so make sure you take advantage!
In this guide, we will list each allowable expense landlords can claim. You can use these expensable items to make your property investments more profitable and increase your income and ROI. The savings will add up quickly.
Common Costs You Can’t Claim
Before we outline the allowable expenses for landlords, let’s first establish what you can’t claim.
The costs and expenses incurred when you buy a property are treated as part of the purchase price. This means they cannot be set against future rental income. Typical expenses (stamp duty, legal fees, surveys and auctioneer costs) should be set against future capital gains liabilities if you sell the property.
Keep all your receipts in one place. Use OpenRent to order your landlord services.
What Costs Can Landlords Offset Against Tax?
The full range of rental property expenses is very diverse. To keep on top of everything keep all your bills and paperwork for anything you do regarding your rental property.
Doing this helps your own accounting. Plus if the tax authorities wanted evidence to support your expenses, you have it to hand.
Tax relief on mortgage interest
One of the most significant changes for buy-to-let landlords in recent years was the Government’s decision to phase out mortgage interest tax relief. Before 2017, all interest payments on your mortgage could be set against tax. From April 2020, that benefit was rescinded. It’s been replaced by landlords receiving a tax credit worth 20% of your annual mortgage interest payments. While the tax credit is welcome, it is not as generous as the previous scheme.
Repairs and maintenance costs
Fair repair and upkeep costs are allowable expenses for landlords. Work such as repairing water leaks, heating problems and broken windows are all allowable. So, too, is the cost for your annual gas safety certificate and service, plus your electrical condition report.
If you purchase these services through OpenRent, we’ll keep all your receipts for you. This makes it much easier for you to use and keep track of your expenses.
Services
Any service charges at your rental property, such as electricity for common access areas, can be claimed as rental property expenses. For a furnished holiday rental, you’ll be paying all utility charges (electricity, gas, water, TV license), which are allowable.
Rent, council tax and rates
If your rental is a flat, then you may have ground rent to pay, which can be claimed. Your tenant will usually pay for rates and council tax, but if you do, even if it’s only for a few months while you find a new tenant, you can set it against your tax.
Insurance
Every landlord must insure rental properties. Your buildings insurance (and contents, if applicable) are an allowable rental property expense.
Wages
This will likely only apply to holiday rentals, but if you engage the services of a cleaner, we recommend you pay a fixed rate and do not provide materials so that they are classed as self-employed. These costs can be set against your tax liability.
Travel expenses
If your rental property is a considerable distance away, you can claim the cost of travel against your taxes. If the trips are genuinely for business purposes, you can claim 45p a mile for the first 10,000 miles and 25p a mile thereafter. You can also include train costs, essential overnight accommodation and meals (for one only).
Admin
Postage, stationery and telephone calls are allowable expenses. You can also claim for using your home as an office if you’re managing your portfolio only. The rates are:
25 hours or more = £10 a month
51 hours or more = £18 a month
101 hours and above = £26 a month.
You will likely be responsible for many properties to require that amount of time.
Replacement furniture and white goods
Replacement items count towards landlord tax expenses, less any proceeds you make from disposing them or selling them on. Landlords of furnished holiday lets, or those claiming the Rent a Room scheme, cannot claim this allowance. Repairs to furnishings cannot be included.
Anything else
Further expenses you pay that are 100% for the property business can be claimed so long as they do not count towards capital gains, such as adding a conservatory, which will improve the property value.
Benefits of Incorporating a Limited Company
The change to mortgage interest rate relief has had a big impact on the number of landlords deciding to manage their rentals through a limited company. More landlords than ever, particularly those with a higher number of rental properties, see value in managing their portfolio in a corporate structure.
Rather than individuals paying personal taxation on their rental income (minus the allowable expenses for landlords), those landlords with a limited company can offset all of the buy-to-let mortgage interest as an allowable business expense.
The landlord director can also claim all standard limited company business expenses, which will help to limit the 19% corporation tax bill due on net profit.
If your only income is from this limited company, then you can claim your full tax-free allowance as a tax-free salary from the business (£12,500 in 2020/21). After that, you can pay yourself a salary at the usual tax rates, but you would be wiser to declare dividends on the net profit the limited company makes.
You pay these dividends to your directors in proportion to their shareholding, although it’s likely you will be the sole shareholder. Currently, the first £2,000 in dividends is tax free, however this is due to be reduced to £1,000 on 6th April 2023. However, at the moment, Directors on the basic tax rate pay 8.5% on dividends, while higher rate taxpayers pay 33.75% on dividends. Additional-rate taxpayers must pay 39.35%.
The challenge for you is to work out whether this is all worth it. For those with a large number of properties: yielding higher rental incomes, being able to offset all mortgage interest, and benefiting from more tax-efficient dividends, will make sense. The benefits will also outweigh the additional cost of setting up and maintaining a limited company.
If you have only one or two rentals, however, with no plans to expand your portfolio, then working out your tax liability and paying HMRC via an annual self-assessment will remain your preferred choice.
Do Your Sums and Claim Back What You Can
With an increasing tax burden on private landlords, you should do all you can to reduce that liability. The landlord tax expenses in this guide will allow you to reduce your tax bill when it comes to filing your self-assessment with HMRC. For those with a more extensive rental portfolio, your calculations might reasonably conclude that setting up a limited company to manage your property business will be more tax efficient.
