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Are you unsure what costs may be offset against your tax bill?
Do you want to avoid tax legally without HMRC breathing down your neck?
The budget announcement changed an awful lot
In previous years you could offset all of the mortgage interest you paid against your property income. If your property was furnished then you were also allowed a 10% wear and tear allowance. Both of these things helped to reduce your tax bill.
But the world has changed since the most recent budget announcements, which I covered extensively in my previous article. Now you will not be able to offset all of your mortgage interest costs if you are a higher rate taxpayer, or even if your rental income before deducting mortgage interest costs pushes you from being a basic rate taxpayer into being a higher rate taxpayer. By 2020 a higher rate taxpayer will only get 20% tax relief against their mortgage interest costs, compared to 40% pre-April 2017. This effectively means that you will only be able to offset half the amount of the mortgage interest incurred against your property business.
There has also been a significant increase in the amount of SDLT payable on new purchases, which I’ve also covered in a previous article.
As you can see it is becoming even more difficult to invest in property while also being tax-efficient.
It is therefore extremely important that you know exactly what costs are allowable…
Allowable costs you can offset against your rental income
The following types of costs may be offset against your property income to help you reduce your tax. This list is not complete but it gives you an idea of what costs may be allowable.
Buying a property
- Repairs: exterior and interior painting, damp treatment, stone cleaning, roof repairs, furniture repairs
- Mortgage arrangement costs
- Legal fees associated with the loan, so legal fees related to mortgage financing of the property
Other costs that you incur when buying a property such as conveyancing fees for the purchase, finder’s fees, the actual purchase of the property, stamp duty and surveys are capital costs. You can’t offset capital costs against your annual rental accounts, but you can offset them against any capital gain when you eventually come to sell the property.
Refurbishment of the property
One of the strategies that I’ve talked about in a previous article is still very much relevant today. By using this strategy you not only minimise your property profits but you could build up losses for the future. This means that you will not pay tax on your property profits in the future as long as those losses exist.
The types of costs that may be offset against your income here are:
- Repairs: When carrying out repairs to broken units, roof tiles, furniture, plasterwork
- Renewals: Such as repainting your property, cleaning costs
- Replacement: For example, kitchen units, bathroom units, heating systems (boilers and radiators), lighting systems (including fuse boxes), carpets, curtains, fridges, freezers, TVs, beds, furniture (if all were in place at the time of purchase)
HMRC had previously stopped people from claiming soft furnishings and freestanding units because it allowed the 10% wear and tear allowance, but since it has removed this allowance, if, for example, carpets and curtains that were already in the property need replacing then the replacement costs would be allowed.
If you wanted to play it extra safe then I would suggest that you ask the sellers of any property you are buying to itemise the following on the sales documents:
- Value of the land and building
- Value of the kitchen
- Value of bathrooms
- Value of white goods (if supplied as a rental)
This can then be used as evidence that there were assets in the property and will support the fact that you are replacing/repairing those assets, which means they can justifiably be offset against your tax. I would stress that you should not put in a kitchen costing £3,000 if the value in the sale documents only shows £1,000 as this will certainly be seen as an improvement and will be considered a capital expense.
This works very well with properties that are in a lettable state but are very tired. As such you can justify to HMRC that the refurbishment costs will help you to increase the rental income of the property.
HMRC guidance can be confusing on this issue, but on the issue of repairs it states:
“If your roof is damaged and you replace the damaged area, your expenditure is allowable.
“Even if the repairs are substantial, that does not of itself make them capital for tax purposes, provided the character of the asset remains unchanged. For example, if a fitted kitchen is refurbished, the type of work carried out might include the stripping out and replacement of base units, wall units, sink etc., re-tiling, work top replacement, repairs to floor coverings and associated re-plastering and re-wiring. Provided the kitchen is replaced with a similar standard kitchen then this is a repair and the expenditure is allowable. If at the same time additional cabinets are fitted, increasing the storage space, or extra equipment is installed, then this element is a capital addition and not allowable (applying whatever apportionment basis is reasonable on the facts).”
Running your property business
Allowable costs as part of you running your property business include:
- Rents and leases
- Business rates
- Council tax
- Water rates
- Ground rents
- Maintenance: cleaning, gardening
- Loan interest and finance charges (100% if you are a basic rate taxpayer but less as mentioned above for higher rate taxpayers)
- Legal and professional costs (removal of tenants, accountancy fees, coaching fees, etc)
- Utilities (if the tenants are not paying for them)
- Travel: to the house and associated companies managing the property
- Hotels (if you are staying away for the purposes of your business)
- Subsistence (while away on business)
- Membership and subscriptions (property-related or management-related)
- Education for employees (provided that the education is enhancing your knowledge)
With regard to mileage, I suggest claiming this rather than putting your car through your business as this would see you incur a benefit in kind or taxable benefit, or HMRC could claim that the car is used for personal usage and significantly limit the costs that you can offset against your property business. I have written a lot more about this subject with a spreadsheet for you to test your circumstances in another article.
Next steps to implement the above
It is one thing to understand the theory but it is another to put it into practice. This is why I have written a step-by-step guide to implementing this strategy:
- Ensure that you keep receipts for all your costs
- Get as much description from your tradespeople on the invoices you pay for refurbishment works. Ensure they use the words ‘repair’, ‘replace’ or ‘renew’ to ensure their work is tax-allowable
- Use a bookkeeping system to record your income and costs
- Review your numbers on a monthly basis to ensure that you are making money
If you want to understand how to implement this strategy or to discuss other finance/tax questions then please book some time with us using the below calendar.
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