Are you considering buying a property to boost your income, grow your investment portfolio or secure a decent retirement pot?
Whether commercial or residential; buying, maintaining and selling buy-to-let properties can be an expensive business, so we’re here to make sure you can maximise your rental income and reduce the amount of tax you pay.
The property rental income you receive will need to be declared on your annual self-assessment tax return (by you or an accountant), so HMRC have your income figures.
If you do not usually send a tax return, you need to register for self-assessment by 5 October following the tax year you had rental income. If you do not, you could be charged a penalty.
Firstly, it’s worth understanding the income tax thresholds in place for the amount of income you can make in a year before HMRC can tax you.
In the current 2022/23 year, this would be £50,270 (£12,570 personal allowance and £37,700 lower tax rate threshold). The £12570 is tax-free, but the £37,700 will get taxed at 20%.
If you make over £50,270, you will start getting taxed on the excess at40%, and if your income exceeds £150,000, the tax rate goes up to 45%.
Understanding these bands will allow you to effectively plan your expenses which you can offset against your income figure.
For example, if you have some repair costs that are going to total£5,000 and you know that you will receive £55,270 income in the year, make the repairs now as you will reduce your income to £50,270 and avoid incurring the higher tax rate.
Paying tax on profit from rental income
You must pay tax on any profit you make from renting out property. How much you pay depends on:
· how much profit you make
· your personal circumstances
Your profit is the amount left once you’ve added together your rental income and taken away the expenses or allowances you can claim.
If you rent out more than one property, the profits and losses from those properties are added together to arrive at one figure of profit or loss for your property business. However, profits and losses from overseas properties must be kept separate from properties in the UK.
Due to the variety of circumstances through which you can earn rental income - and the variable rules for each, when it comes to figuring out your rental profit, we advise speaking to your accountant.
You can access further guidance from HMRC at:
You can deduct expenses from your rental income when you work out your taxable rental profit as long as they are ‘wholly and exclusively for the purposes of renting out the property’, you can check out some of HMRC’s examples of this at Examples of how to work out Income Tax when you rent out a property - GOV.UK (www.gov.uk).
Genuine repairs are included and allowable to claim against your rental income. A repair would be be fixing something that no longer works or mending something which is damaged. This excludes anything that would be an improvement to your asset as it would then be classed as capital expenditure.
Any repair work or improvements to the property before renting it out would not be allowable as this is classed as capital expenditure.
Items attached to your property (such as sinks) are counted as part of the property and repairs to these items are included as genuine repairs. However, if you simply upgrade an existing appliance with a more modern feature, this would not count as a repair.
If you’re unsure whether something could be claimed as a repair speak to your accountant as they will be able to advise whether you can or cannot claim for it.
Legal and Professional Fees
If you take a training course, you can claim some course fees where the education relates to your property business.
Even some of your accountant, solicitor, surveyor and estate agency fees can be deducted too. Not all fees can be claimed however, so to get an accurate understanding of what you can claim, speak to your accountant and explain the circumstances of each cost in question.
In most instances, you will need assistance finding tenants to rent your property, this can come from an estate agent service. The agent’s fees including advertising and commission are allowable.
There are two options for claiming expenses against your income, providing of course that transportation is required to run your property business.
- You can claim the simplified expense ‘flat rate’ for mileage which is 45p per mile for the first10,000 miles and then 25p per mile thereafter (motorcycles 24p per mile). As repairs and fuel are factored into this rate, you cannot claim them on top.
- Alternatively, you can claim a percentage of the costs associated with running your motor vehicle, this excludes personal use so you cannot claim the total expenditure of the vehicle. You must calculate what percentage of the travel was solely for business and claim that cost alone.
Whichever option you choose to go with, you will have to stick with until you change your vehicle. HMRC do not allow you to go back and forth between the two in a year.
Other Travel and Subsistence
This covers any business travel by taxi cab, plane or train and hotel costs. This must be a clear business trip. If you have any family or friends travelling with you, you must keep your expense receipts separate from theirs.
If you work from home, you can claim the business portion of your home expenses. These costs are worked out based on the amount of floor space you use whilst working and the amount of time you are working for.
As with the motor expenses, there is an alternative simplified expenses flat rate option you can claim instead. Contact your accountant to find out which option of would workout best for you, as again once you choose an option you will need to stick with it moving forwards.
Note: You can only use simplified expenses if you work for 25 hours or more a month from home.
The costs associated with the running of your business are claimable expenses, these include direct costs such; as phone calls, stationery and advertising for new tenants.
If you aim to offer an enhanced service and standard of accommodation as part of the tenancy, the costs of services, including the wages of gardeners and cleaners are also an allowable expense.
Before you get going in the day to day, it’s worth noting that some pre-trading expenses that would be allowable after your business starts trading can be deducted. Your accountant will be able to help you to determine which initial start-up costs incurred can be claimed.
Other Allowable Expenses
Other incidental expenses that can be claimed are as follows:
- Council tax and utility bills (but only where you are paying them instead of the tenant)
- Ground rent and service charges
As this is not an exhaustive list of other allowable expenses potentially claimable, please get in touch with us if you would like to ask about any others you would like to claim. We would be more than happy to help.
HMRC do understand that you may fall on hard time and, to that effect, they do allow you to offset losses from one property against the income from another. Rental losses can only be offset against rental income though and not against other types of personal income. If ever in this situation, remember to include your losses on your self-assessment return.
Note: You cannot offset losses from a commercial or rental let property against a furnished holiday let property and vice versa, so these will need to be kept separate.
Though we have covered most above, it’s clear there is a lot you can do with your expenses to reduce your income tax liability!
The rules around property rental so change therefore, the information contained within this article should not be used as /or a substitute for professional advice. If you are unsure about the latest regulations affecting rental income and expenses, please call us, and we will be happy to help you.
At Blue Rocket Accounting we provide expert advice for landlords looking to expand their property portfolio and support our clients with tailored advice. Our team of qualified accountants will guide you through what expenses are allowable so you can grow your property business whilst keeping on the right side of HMRC when it comes to tax and legislation. Speak to us today to share your plans, we’d love to hear them!
Call us on 01322 555442 or email firstname.lastname@example.org
Also, if you would like to discuss your options around accessing a ‘Buy to Let’ mortgage, we advise arranging a no obligation call with our Blue Rocket Mortgages expert mortgage advisor Rebecca Burden.