1. Look to claim costs as ‘Revenue’ costs
If you can claim high costs as ‘revenue’ rather than ‘capital’ costs, you can reduce your annual property income tax bill in a big way.
Sometimes it is easy to determine whether a cost is capitalized. For example, if you have had a new conservatory built, or even a new bedroom added, this is a capital expense. This is because it has increased the value of the property.
However, sometimes distinguishing between the two costs is not so clear.
Consider the replacement of windows. If you currently have rotten single-glazed windows, you will 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 is generally accepted that the standard windows used in modern properties are UPVC, not wooden single-glazed ones. So you are replacing the current standard window fitting with a like-for-like window. Remember: Classing a cost as a ‘revenue’ cost will improve your cash flow as you will pay less property income tax.
2. Claim tax relief on ALL revenue expenditures
Remember the golden rule: If you have incurred a revenue expense for your property’s purpose, you can offset it against the rental income.
This means that you can continue to lower your tax bill – legitimately. Most investors know they can offset mortgage interest, insurance costs, rates, decorating/repairs, wages, and services costs. However, so many investors fail to claim the following costs, which, when added together, can provide a significant tax saving:
Costs incurred when traveling 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
– Subscription to property investment-related magazines, products, and services
3. Make sure 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 an increasing number of people have been making an annual rental loss. By registering these losses with the Inland Revenue, you can take them forward and offset them against future profits. Given that the past few months have 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 registering your previous year’s losses, you will be reducing your tax liability in the future. Although it is not a compulsory requirement to register your losses with the Inland Revenue, it will work to your advantage and, most importantly, will save you 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 are a higher rate taxpayer, 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, meaning that tax liability could be significantly reduced.
If your spouse does not work, this is a compelling strategy, as any tax liability can be legitimately wiped out. Please note: 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 offer a fully furnished property, using the 10% wear and tear allowance may be tax benefits. This is because you can start to claim the relief as soon as you receive income from the property. If you have purchased a property in the last twelve months and fully furnished it, then you MUST consider the costs incurred.
If the cost was high, using the 10% wear and tear allowance might be better.
This is because:
You will provide high-quality furnishings and will not expect to replace them for a good few years, i.e., 5-7 years. Therefore, you can start claiming the relief immediately by claiming the 10% wear and tear allowance. This means up to 10% of your rental income will be deducted.
If you do not claim the allowance, you will use 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 is replaced, which could be 5-7 years in the future.
If you decide to sell the property before you renew the furnishings, then using the ‘renewal basis,’ you will not have managed to offset any renewal cost against your property.
This means that you will have incurred unnecessary taxes!
However, if you use the ‘10% wear and tear allowance,’ you can claim this from the date you purchased the property. If you have purchased a property that includes furniture and furnishings, it will be beneficial to claim the allowance.