They say no one is ever as modest about their income as when they’re filling in their tax return. Jokes aside, when it comes to buy-to- let tax, the name of the game is to deduct every cost you legitimately can. If you’re a 40% higher-rate taxpayer, every £100 expense you claim could cut your tax bill by £40.
So what can you claim back?
Capital versus revenue expenses
Capital expenses. The buying costs (the property itself, stamp duty, legal fees, surveys) plus any work to improve the property, such as an extension. Inflation takes all the fun out of these: you can deduct them only once you sell the property, by which time the solicitor’s bill you filed 20 years ago might stretch to a packet of Maltesers.
Revenue expenses. Now you’re talking. As long as they are for letting your property, you can deduct all running costs from your rental profit as you go along.
What you can claw back from your rental income
What are legitimate revenue expenses? You can claim just about every cost after the point of buying your property, for example:
- Repairs that restore the property to its previous condition rather than making it better. This includes painting, double glazing (you’re usually not allowed to fit single glazing nowadays) or even updating a bathroom or kitchen to a more modern look without making it bigger. Works done up to seven years before the property is let out also qualify, if you can show they are for the purpose of preparing the property to let. An accidental landlord could claim for repainting their home just before they move out, but not for that shiny new kitchen island fitted six years prior
- Letting agent fees and advertising
- Furniture bought for the property
- Service charges and ground rents
- Deposit protection fees, gas safety checks and energy performance certificates
- Utility, cleaning or gardening bills paid by you
- Accountancy fees
- Legal advice, for example on your tenancy agreement
- Bad debts.
Some less obvious, more general expenses also qualify:
- Relevant costs up to seven years before you start letting out your first property, such as tax advice
- Professional fees, such as for a landlord association
- Travel, phone calls, postage and food (but not your time) while running your property business
- A portion of household bills if you run said business from home
- Education (yes, even buying The Accidental Landlord).
There is pressure on the government to reduce the allowable expenses, so it’s best to check with your accountant for any changes.
Of course you don’t want to incur costs just to save tax, but you do want to keep good records so you can make costs count. You have to hold on to all receipts for six years. To ease bookkeeping, open a separate current account solely for your property. And if you hire one firm to do both improvements and repairs (a loft conversion and a repaint, say), ask them to separate out the invoices.
Are you still awake? Have you spotted the missing item on our long list of allowable expenses above? (Hint: it’s probably your biggest cost.) Yup, that’s your mortgage interest. Thanks to the Great Buy-to- let Bashing, otherwise known as “Section 24”, you can’t deduct that as a cost anymore. We will deal with that in a separate post.