Higher mortgage rates and buy-to-let tax relief crackdowns could leave landlords facing hefty self-assessment bills, but there are still ways to shelter your cash from the taxman.
The perks of buy-to-let investing have gradually been eroded in recent years.
While landlords could once offset mortgage interest and other finance costs from rental income to reduce their tax liability, this is now restricted to 20pc relief.
The difference has come to the fore as mortgage rates have increased this year, denting how much a landlord can reduce their tax bill by, and potentially pushing buy-to-let investors into higher tax bands.
Meanwhile, a reduction in capital gains tax (CGT) allowances, which came into force in April, could also mean higher tax liability if landlords decide to sell-up.
Despite rising costs and responsibilities, almost 3 million individuals declared property income on their most recent self-assessment forms for the 2021-22 tax year, according to HMRC.
Making sure you know when to file your return, the tax you may need to pay and the expenses you can claim will ensure you minimise your bill and avoid any fines.
Here is what landlords should consider when filing their 2022-23 tax returns.
Get ready for deadline day
The deadline for filing a paper self-assessment tax returns was October 31, so you have already missed that – but you have until January 31 2024 to submit your documents online.
There is an automatic £100 fine for late filing, which increases to a £10 daily charge after three months, and a further 5pc of any tax owed (or £300 if greater) after six months, so it is important to be organised to avoid penalties.
The forms will need to cover any previously untaxed income from the 2022-23 year.
Both the documents and any tax owed has to be paid by January 31, so bear that in mind if you need an accountant to help.
They will need time to work on your return, along with their other clients, and there may be information you need to source such as records of your total rental income for the year and details of any expenses incurred.
You may also need to register for a government gateway login and set up your personal tax account, so leave enough time to get that sorted.
Starting as soon as possible can ensure you have enough money set aside for the bill – and even reduce how much you have to pay.
“If you leave the preparation of your tax return until close to the filing deadline you may find yourself with a nasty surprise when your tax liability is calculated so close to the payment due date,” said Chloe Moss, chartered accountant at Tunstall Accounting.
“I always recommend that clients prepare their returns as soon after the end of the tax year as possible.
“If clients are making payments on account, filing their tax return before July 31 may mean that their second payment on account is reduced if their income is less than expected, so it’s always a good idea to aim to file before the end of July.”
Pay the right tax
Landlords may need to file a self-assessment return to ensure they pay income tax on the rental income they receive – you’ll need to detail this, and any other forms of income you receive, even if you’ve already paid tax on it (such as employment income).
You may also owe National Insurance if your profits are more than £12,570 a year and being a landlord is your main job.
However, you may not owe any tax if your income from rent is below a certain level – but you’ll still need to submit a return.
As well as the £12,570 personal allowance, there are some additional tax-free allowances that can be applied to your income. There is a property allowance of £1,000 a year if you earn income from land or property.
If you own a property jointly, each individual can use the £1,000 allowance against their share of the gross rental income – but if you apply this allowance, you won’t be able to claim individual allowable expenses.
Tax guidelines say you need to contact HMRC if your gross income is between £1,000 and £2,500, and must register for self-assessment if it is above that.
If you receive rental income from letting a room in your main home, you may be eligible for the “rent a room scheme”. Using this, you can make up to £7,500 per year tax-free.
Get relief on mortgage interest
One of the main perks of buy-to-let was that landlords could offset mortgage interest payments on their tax bill.
Since April 2017, this has been restricted to 20pc relief – quite a drop, since higher-rate taxpayers would once have been able to claim back 40pc. You’ll receive this as a tax credit.
This means more of a landlord’s income is subject to tax, and they may also be pushed into higher tax brackets, which would potentially push self-assessment bills up further.
“Tax relief is only permitted on the interest element of any mortgage payments, not the capital repayment, so you will need a statement from your lender detailing the total interest paid for the tax year,” said Ms Moss.
“This reduction cannot be used to create a tax refund, but any unused relief can be carried forward to later years.”
Landlords can still access the full mortgage interest relief if they operate through a limited company, but it’s not necessarily a cheaper option.
For instance, there would be stamp duty and administrative costs to moving an existing portfolio into this structure, plus mortgage rates can be higher.
Prepare for falling allowances
Tax-free thresholds for capital gains income was already cut from £12,300 to £6,000 in April, and will be halved again in the next tax year.
If you plan to sell an investment property soon, you must budget for CGT allowance to “drop significantly over the next two tax years”, said Allison Thompson, national lettings managing director at estate agency the Leaders Romans Group.
“For anyone with gains above the allowance, CGT will be payable on an additional £9,300 by the 2024-25 tax year – that’s an extra £1,674 on the tax bill for basic-rate taxpayers and £2,604 more for those in the higher-rate bracket,” she said.
Claim for allowable expenses
The taxman does still let landlords claim for other costs of running a rental portfolio, known as “allowable expenses”.
HMRC has a list of allowable expenses at gov.uk that you can claim if you pay for general maintenance and repairs to the property, as well as water rates, council tax, gas and electricity.
“Do you pay a cleaner, ground rent or commission to a letting agency? They’re all expenses you can claim,” said David Portman, director in the tax practice at chartered accountants and business advisers Lubbock Fine.
“So are your accountant fees and costs of travel to a property if you’re inspecting it.
“With how much the cost of insurance has risen in the last couple of years, it’s now particularly important to claim the cost of your building insurance as an expense.”
Timing your expenses can also save you money on your tax bill.
“For example, look at your profits in February and see whether it would be worth accelerating some expenses into this year,” Mr Portman added.
“Does one of your properties need a new boiler? It might be worth doing it before April 5. This will lower your profit and might help you stay in a lower tax bracket.”
The personal taxes draining your income – how to make sure you don’t overpay
To successfully claim expenses against your income, you’ll need to keep detailed records and proof of the income you’ve received and what you’ve spent. This includes receipts, invoices, bank statements and rent books will all be required, should HMRC ask for evidence of your finances.
You can face penalties if your records are not deemed to be “accurate, complete and readable”, and if you don’t keep them for the required amount of time – at least five years after the January 31 deadline.
Put your losses to good use
If your allowable expenses exceed the income you’ve made from a property, you’ll have made a loss. This can be used against profits you make in the future.
For example, say you earned £5,000 from a property in 2021-22, but spent £10,000 on allowable expenses. Your loss would be -£5,000.
The next year, let’s say your profit was £10,000. You could use the £5,000 loss to make your profit £5,000 for 2022-23, thereby reducing the amount of tax you owe.
Alternatively, if you have more than one rental property, you can pool the profits and losses you make from all of them and essentially offset one property’s loss against another property’s gain.
In this case, let’s say you have three rental properties. One makes a £3,000 profit, another makes a £7,000 profit, while one makes a -£5,000 loss. When taken as a whole, relief on the losses can be automatically applied against the other properties, making your overall taxable profit £5,000.
Watch out for tax traps
Landlords need to make sure they distinguish between allowable revenue-related expenses that are solely for the purpose of renting out a property, and capital costs that can’t be claimed.
“Allowable expenses, which can be deducted from your rental income, typically include day-to-day operation or maintenance costs,” said Karen Noye, mortgage expert at Quilter.
“On the other hand, improvements are more substantial and are aimed at enhancing the property’s value or extending its life.
“These cannot be deducted from rental income but may factor into CGT calculations if the property is sold.”
Improvements include major renovations like adding extensions, installing new kitchens or bathrooms, significant energy efficiency upgrades like adding solar panels, extensive landscaping works, and significant structural changes such as converting a building’s use.
Similarly, legal fees related to purchasing the property are not claimable, added Ms Noye.
Claiming the wrong expenses, and paying less tax than you owe as a result, could result in a penalty from HMRC.
The tax authority has a sliding penalty scale for mistakes and errors; careless mistakes can be charged up to 30pc of the “lost” tax, whereas deliberate mistakes could incur a charge of up to 100pc.
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