This month in Tax Tips Q&A, we answer questions about offsetting expenses against rental income profit and what to do when that income equals a loss. We also have a question about tax on rental income.
These property questions and answers have been shared with us from Arthur Weller’s ‘247 Property Tax Questions Answered’.
What Expenses Can I Offset Against Rental Income?
I have just purchased my first buy-to-let property and have managed to successfully let it out. However, I am unsure as to what expenses I can offset against my rental income.
Remember the golden rule: If you have incurred a revenue expense for the purpose of your property, then you can offset it against the rental income.
This means that you can continue to lower your tax bill – legitimately. Most investors are aware that they can offset mortgage interest, insurance costs, rates, costs of decorating/repairs, wages and costs of services. Note new rules for mortgage interest from 6 April 2017.
However, so many 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). But note new rules from 6 April 2017.
- Advisory fees e.g. legal and accountancy.
- Subscription to property investment related magazines, products and services.
Can I Offset Rental Income Losses?
I realise that such losses can normally only be offset against profits on rented property. However, what is the position if I sell the property I rent out, but there are remaining losses which I therefore cannot offset in the future? Can I then offset these against my income, which is all from pensions or do I simply have to forget this loss?
In HMRC’s Property Income manual at: www.hmrc.gov.uk/manuals/pimmanual/PIM4210.htm it explains, like you said, that rental losses can only be set against profits from the same rental business. If that rental business ceases, the losses cannot be used. However, if you look at www.hmrc.gov.uk/manuals/pimmanual/PIM2510.htm you can see the rules for cessation of a rental business. For example, if at the time this rental property is sold the taxpayer still owns another property that they are actively trying to rent out then this rental business has not ceased.
How Much of my Mortgage Payment Can I Offset?
Can I classify the total monthly mortgage repayment against total monthly rental, or only the interest element?
Only the interest element of the total monthly mortgage repayment can be treated as an allowable business expense to offset against your gross rental income. The remainder is a capital expense that reduces the original debt that you owe the lender, and is not relevant to your rental business.
From April 2017, there are new rules for a residential property landlord claiming relief for interest paid to a lender.
We hope these questions have given you some insight into the options available to you when faced with situations such as these. Check back next month for more questions and answers from Arthur Weller. If you can’t wait to read more from ‘247 Property Tax Questions Answered’ the full book is available in the Landlords’ Tax Pack.
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