What are the top tips on optimising your tax liability?
Follow these tips for a tax-efficient year
- Offset your mortgage payments All of the interest payable on your buy-to-let mortgage can be offset against your tax bill. As most buy-to-let mortgages are interest-only, this means you could offset all of your repayments.
- Deduct your finance fees Mortgage arrangement charges, fees you pay to a mortgage broker or adviser and any other incidental costs associated with sorting out buy-to-let finance are also tax deductible – you can claim them back in the tax year within which you arranged a mortgage or re-mortgage.
- Letting costs If you use a professional lettings agent either to simply find a tenant or to manage the entire property, you will usually pay out between 10% and 15% of the rental income in fees. You can claim all of these fees as expenses against your tax bill, as well as any accountants’ fees you may incur.
- Claim your search costs You can claim back the cost of advertising for tenants and deduct the cost of buying a tenancy agreement, checking the tenants’ credit score, checking references, paying for a professionally compiled inventory and also the charges associated with joining a tenancy deposit scheme.
- On your bike! You can claim the expense of travelling to and from the property, buying stationery and making phone calls relating to the rental against tax.
- Claim your cover Buildings insurance on your property is mandatory and you may have cover for white goods and electrical appliances, as well as home emergency cover and rent guarantee insurance, for example. All of these premiums can be added up and set against your annual tax bill.
- Refer your repair bills Money you spend on resolving wear and tear, making repairs around the property, painting and decorating and maintaining its quality is tax deductible. Renovations, improvements and extensions, or anything else which adds to the value of the property, is not.
- Don’t forget the furnishings If you rent out a furnished property, you can offset a ‘wear and tear’ allowance of 10% of the annual rent against your tax liability. You can also offset the cost of replacing any individual pieces of furniture that might wear out or break during the course of the year. You cannot offset the initial cost of furnishing the property.
- Flat fees If your rental property is a flat, you will usually be a leaseholder, rather than a freeholder, and will have to pay charges such as ground rent and service charges. These vary hugely, ranging from a ‘peppercorn’ ground rent on some ex-council properties (which could be as little as 1p or £1 a year) to a hefty charges on newer luxury flats. Service charges are supposed to cover the costs of cleaning and maintaining communal areas, but may also include security and gardening, for example. These can all be offset against your tax liability. If you pay council tax or utility bills on the property, you can also claim these costs.
- Partner power Another thing to consider is whether the ownership of your property is tax efficient. If your spouse is in a lower tax bracket than you, it might be worth putting the property in their name to lower the bill. But be aware that doing so could have implications for other taxes such as capital gains tax (CGT). As well as CGT, consider your inheritance tax liability, which is 40% above the £325,000 per person allowance.