Nobody likes to deal with taxes. However, in business, they’re one of your most crucial expenses. They also pose one of the biggest financial risks. Even a slight error in your tax payments can get you in trouble with the government. Thankfully, there are legal ways to reduce them and get tax benefits.
If you’re a landlord in the UK, you can deduct several expenses from your rental income. However, those expenses must be wholly and exclusively made for the purposes of letting out your property. For example, if you bought disinfectant products for your occupied flats but you also used them to clean the vacant flats, you can’t include the disinfectants in your deductible expenses anymore. It only becomes deductible if a tenant has benefited from it.
These conditions can confuse some landlords who are trying to compute their taxes. If you feel the same way, here’s a simplified guide to reducing your taxes in your rental properties:
1. Compute Your Allowable Expenses
To reiterate the statement above, you can deduct several expenses from your rental income, provided that they’re solely for the benefit of renting out your property. Such expenses are called allowable expenses. In addition, you can claim expenses for the interest on a mortgage.
The other types of expenses you can deduct are:
- General maintenance and repairs, except home improvement
- Council tax
- Utilities (water, gas, and electricity)
- Cost of services (wages of gardeners, cleaners, and other maintenance personnel)
- Transportation costs used for your rental property
- Agent fees and property management fees
- Accountant’s fees
- Advertising costs and direct costs of attracting tenants (e.g., phone calls)
Personal expenses made for business purposes — such as new clothing you’ve worn on a meeting with tenants — aren’t deductible.
2. Claim Part of Your Expenses
There are some situations in which you can claim expenses that aren’t wholly and exclusively for the purpose of letting out your property. You can only deduct a part of those expenses that was used for your rental property business.
For example, a tenant has asked to replace the broken tap in her unit. A new one costs £60. However, the hardware store offers a 50% discount for purchases of £150 and above. Since the offer is too good to miss out on, you bought more items to reach £150 and pay only £75 for several items. In that scenario, you can claim the price of the new tap against your rental income. The rest of the items won’t count as deductibles.
3. Reduce Your Capital Gains Tax
You can’t deduct expenses of a capital nature from your rental income. As such, renovations aren’t part of your deductibles. However, you can use the cost of a renovation, which counts as an investment, to reduce your capital gains tax when you sell your rental property.
Any type of home improvement is included in the capital allowances on residential property letting. As long as you owned the property when the improvements are made, you can claim them against your income when it’s time to pay your capital gains tax.
4. Claim Your “Wear and Tear” Allowance
Items in your rental property that needs repair or replacement are also deductible expenses. The new law allows landlords to claim tax relief on expenses related to what’s considered a “domestic item.” However, note that this only applies to items that you’re replacing. The deductions can only be applied if the replaced item is no longer used in the property.
To avoid confusion, some examples of specific items considered domestic are:
- New beds
- New carpets
- New crockery or cutlery
- New curtains or shades
- New appliances
- New sofas
Again, the items that have been replaced should be removed from the rental property for the expense to become deductible.
Factors that Can Affect the Costs You Can Deduct
Other than incurring expenses that aren’t solely for the purpose of letting, uncommercial lets will also affect the costs you can deduct. Uncommercial lets refer to the act of renting out your property as an act of kindness instead of profit. You’d usually offer uncommercial rents to someone you know, like a friend or family member.
Instead of charging them the commercial rent, you may charge them a discounted rate. Thus, if you incurred expenses for their unit, you can only deduct the costs up to the amount of the rent you received. For example, if you incurred £4,000 worth of expenses but your uncommercial rental income is just £3,500, the £500 excess is no longer deductible.
Study the tax laws of your area well so that you can maximize all opportunities to reduce your tax. Considering the last scenario, try to avoid uncommercial lets, unless you’re willing to charge your tenants the full commercial rent.