5 ways to slash your property income tax bill

Before we reveal the five tax-saving tips you, as a landlord, can use to avoid income tax liability, here are the important deadlines for submitting your tax returns and any tax liability due:

Important dates for your landlord tax diary

30 September

If you want HM Revenue & Customs (HMRC) to calculate your property tax liability for you, then you must declare your property transactions from 6 April 6 2007 to 5 April 2008 to the HMRC no later than 30 September 2008.

HMRC will then notify you of any landlord tax that is due and it must be paid by 31 January 2009.

5 October

If you have generated any rental income profits (chargeable gains), then you must inform HMRC of this within six months of the end of the previous tax year. This means that if you made rental income profits in the 2007-2008 tax year, then you must notify HMRC of this no later than 5 October 2008.

31 January 2009

But if you employ an accountant, or you calculate your landlord tax liability yourself, then the deadline is 31 January 2009. Not only must you submit your completed tax returns, but you must also make all tax payments by this date. Failure to do so will lead to you receiving a non-negotiable £100 fine from HMRC.

1. Look to claim costs as 'revenue' costs

If you can claim large costs as 'revenue' costs rather than 'capital' costs, then you can reduce your annual property income tax bill in a big way.

Sometimes it's easy to determine whether a cost is of a capital nature or not. For example, if you have had a new conservatory built, or even a new bedroom added, then this is clearly a capital expense. This is because it has increased the value of the property.

But sometimes distinguishing between the two costs isn't so clear.

Consider the replacement of windows. If you currently have rotten single glazed windows, then you will be able to replace them with UPVC double glazed windows and offset the entire cost against the rental income. There will be no need to class this as a 'capital cost'.

This is because it's generally accepted that standard windows used in modern properties are UPVC and not wooden single glazed windows, so you're replacing the current standard window fitting with a like-for-like window.

Remember that if you can class a cost as a 'revenue' cost, it will improve your cash flow as you will pay less property income tax.

2. Claim landlord tax relief on ALL revenue expenditures

Remember the golden rule that if you have incurred a revenue expense for the purpose of your property, you can offset it against the rental income.

This means that you can continue to lower your tax bill - legitimately. Most property investors are aware that they can offset mortgage interest, insurance costs, rates, the cost of decorating/repairs, wages and costs of services.

But so many property investors fail to claim the following costs, which, when added together, can provide a significant tax saving:

  • Costs incurred when travelling back, and to, the investment property
  • Advertisement costs
  • Telephone calls made (or text messages sent) in connection with the property
  • Cost of safety certificates
  • Cost of bank charges (i.e. overdraft)
  • Advisory fees (e.g. legal and accountancy fees)
  • Subscription to property investment-related magazines, products and services

3. Make sure that you register any rental losses

We cannot stress this point enough.

The generally low rental yields on buy-to-let investment properties purchased over the past few years have meant that an increasing number of people have been making an annual rental loss.

By registering these losses with HMRC, you will be able to take these losses forward and offset them against future profits. Given that the past few months has seen a rise in rental yields, there is a strong likelihood that your investments will now be starting to return an annual profit.

Therefore, by having registered your previous years losses, you will be reducing your tax liability going forward.

Although it's not a compulsory requirement to register your losses with HMRC, it will work to your advantage and most importantly you will pay less tax.

4. Switch property ownership with your spouse if they are lower-rate taxpayers

If you have a spouse who is a lower rate (or even nil-rate) taxpayer and you're a higher rate taxpayer, then consider moving the greater portion of the property ownership into their name.

This means that a greater part of the profit will be attributed to the lower (or nil-rate) taxpayer, which means that any property tax liability could be significantly reduced.

This is a very powerful strategy if your spouse doesn't work, as any tax liability can be legitimately wiped out.

Please note that in order to use this strategy your partner must be trustworthy as legally they will 'own' a greater share of the property.

5. Mix and match the 10% wear and tear allowance

If you're letting out a fully furnished property, then it may be tax beneficial to use the 10% wear and tear allowance.

This is because you can start to claim the relief as soon as you start to receive income from the property.

If you have purchased a property in the last year, and have fully furnished it, then you MUST consider the costs incurred for furnishing the property.

If the costs were high, then it may be better to start using the 10% wear and tear allowance.

This is because:

  • You will be providing high-quality furnishings and you won't need to replace them for a good few years (i.e., five to seven years).

    Therefore, by claiming the 10% wear and tear allowance you will be able to start claiming the relief immediately. This means that up to 10% of your rental income will be deducted.

    If you don't claim the allowance, then you will be using the 'renewals' basis method, which will not be used until you replace the furnishings. So, for example, if you spend £7,500 furnishing a brand new property before you let it, then none of this cost can be offset against your income until it's replaced, which could be five to seven years in the future.

  • If you decide to sell the property before you renew the furnishings, then by using the 'renewal basis,' you won't have managed to offset any renewals cost at all against your property.

    So you will have incurred unnecessary taxes!

    But if you use the 10% wear and tear allowance, you can claim this from the date that you purchased the property.

Also, if you have purchased an investment property that includes furniture and furnishings, then again it will be beneficial to claim the allowance.

More information

Published on: June 4, 2008

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