Offsetting property income tax – READERS QUESTION

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Offsetting property income taxIan MacQueen has submitted the following “Readers Questions” article seeking advice on offsetting property income tax.

I have been renting out two properties for a number of years now. In the first few years the interest on my mortgages was so high that I could offset this against the earnings with little tax to pay.

For the past 4 years I have worked abroad, paying no tax on my UK income and therefore having my UK tax allowance free to cover my property earnings. I have recently moved back to the UK and with the interest portion of my mortgage now lower I look set to start having to pay more tax. In light of this I am investigating ways of legitimately offsetting the tax. I currently do all repairs on the properties myself and therefore do not have repair bills just receipts for materials used. Is there anyway to offset more of the costs associated with these repairs? Time, travel expenses, tools, etc?

Also I am now in the upper tax bracket so paying 40% tax on some of my earnings. Will the income from property therefore be taxed at the higher (40%) rate too?

I look forward to your replies.

Thanks in advance – Ian

Mark Alexander’s advice

Mark Alexander - private landlord since 1989 and founder of Property118.com

Forums provide an excellent opportunity to pick up useful tips but please don’t take everything you read on forums to be true. By all means follow up any ideas by consulting HMRC directly but I do strongly recommend getting professional advice and always get your questions answered in writing. Good professional advice is not cheap but I look it it this way – if the professional advice I receive saves me more than it costs then it’s good value, especially as professional advisers will carry professional indemnity insurance which can be claimed upon in the event of receiving poor advice.

If you would like me to introduce you to the tax advisers I use please complete the short form below.

Accountants Introduction Request

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Comments

  • Hi Ian,
    I will give you the best advice I can based on my experience.

    I’m not going to quote my qualifications here.

    Firstly many of the terms you are using are not correct accountancy terms so let me clarify a few things first:

    1. “Earnings” on your properties is known as income

    2. The things you spend on your property are known as Expenses,

    3. You can claim Expenses for a number of things such as tools, use of your car to carry out your repairs, the cost of materials etc and the interest element of your mortgage payment.

    4. You quote “offsetting tax” . I think what you are asking is, are there any Allowable Expenses that you can use against your property income to reduce the net profit. Assuming this is the case, see Point 3 above.

    5. If you make improvements to your property which are outside the description of maintenance and repairing things, you can set these aside in an “Enhancement Expenditure” account and use these against any Capital Gains once you sell “Dispose of” the property.

    6. There are other things which are a little more complicated to explain about how losses on properties can not be offset against profits on any self employed work you might do.

    Does this clarify things a little for you?


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  • Ian,
    If you leave your email address I will send you the details of an accountant.

    Thank you


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  • Richard, thanks for your feedback. Yes you are correct I am asking if there are allowable expenses that I can claim and so yes you have clarified somewhat. In terms of using your own car when carrying out repairs do you simply claim back the fuel costs or can you claim some sort of mileage allowance?

    Thanks once again.

    Ian


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  • Hello Ian,
    HMRC (Commonly know as The Tax Man) give you two options.

    1. You can claim fuel costs + vehicle repairs

    OR

    2. You can claim Mileage Expenses as shown in the link below

    http://www.hmrc.gov.uk/paye/exb/a-z/m/mileage-expenses.htm

    In your case the category it is likely to be……

    Cars and vans
    45p/mile for first 10,000 miles
    25p/mile above 10,000 mile

    Your next question is likely to be “Can I claim both fuel/ vehicle expenses and mileage expenses?”

    But as most accountants will tell you “No, you can’t have your cake and eat it”

    I strongly suggest you have someone deal with your accounts as things can get tricky if you’ve not been trained in accountancy.- No offence implied.

    This is especially the case if you have to deal with a loss in a particular year and to ensure you are claiming all your allowable expenses.

    If you post your email address here or maybe just set up a second email account and post that here on the forum, I can then help you.


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  • Hello Ian, Do you let the properties furnished or unfurnished? For unfurnished properties, there are going to be changes from the next financial year regarding what you can claim against tax. There has been information about this matter in this website. I let my property furnished, so can tell you more about taxation for furnished properties. You can claim 10% of the gross rent (excluding council tax and water charges) as “wear and tear”, but then cannot claim the cost of replacement of any furniture or other items in the property. You can also claim up to 10% for the management cost of the properties (such as letting costs, the cost of any travel to inspect the properties, oversee repairs, etc.) You can also claim the cost of repairs, but not improvement of the properties. I am afraid I don’t know if you can cost your own time in carrying out the repairs, as I have never done repairs myself. You can also claim any expenditure on insurance and related costs. If you do your tax return online, HMRC actually gives quite a lot of advice regarding filling in the form, and no doubt you can source the information on their website. However, It may be useful to employ an accountant/tax advier to help you get started. If you make a loss in a rental business, you can carry forward the loss, but you cannot offset it against any other tax liability. If you are currently a higher rate tax payer for your employment, I am afraid your net rental income will be lumped together with your earned income, and you will be taxed at your marginal rate. For this reason, it is very important that you utilise any deductions you can legally make against the rental income. Good luck!


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  • Satu –

    Many thanks for your comments. I rent both properties out fully furnished. I have been deducting the 10% wear and tear but was not aware that I could claim 10% for property management costs so that is really helpful – I will look into this further. I think I will take the advice of you and Richard and employ an accountant to assist with my tax return for 2012/2013. I have a family friend who is an accountant so will check if they can help first.

    Thanks to both you and Richard for your comments.

    Ian


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  • Satu –

    Many thanks for your comments. I rent both properties out fully furnished. I have been deducting the 10% wear and tear but was not aware that I could claim 10% for property management costs so that is really helpful – I will look into this further. I think I will take the advice of you and Richard and employ an accountant to assist with my tax return for 2012/2013. I have a family friend who is an accountant so will check if they can help first.

    Thanks to both you and Richard for your comments.

    Ian


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  • @ Ian,

    Good decision.

    Tip: You may have intentions of moving into your BTL before you sell it (no answer required) .

    Therefore ask your accountant to tell you about deemed occupation and how this helps reduce anu CGT liability.

    Take care.


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  • t says:

    after refurb BTL income will replace salary, have a residential mortgage ,as the rent will be my only income save a small pension how will this affect my tax situation does the residential mortgage I pay come off the income I will receive from the BTL which will be about 3/4 times the mortgage payment so amply cover both mortgages .or will I be taxed at 40% rental income from the BTL property after that mortgage payment first then pay the residential mortgage from the income after tax. many thanks for any information T


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  • @t

    I will answer you questions according to what I think you mean and I hope this simplified explanation helps you.

    Giving up your salary and living on your income from your rental property will mean you will be self employed.

    Expenses from your “refurb” will be subtracted from your property income to arrive at a net profit figure.

    If you have an interest only mortgage you can claim the whole amount as an expense. If you have a repayment mortgage you can claim the interest part of your mortgage payment as an expense.

    Once the Net Profit figure is calculated your Personal Allowance will be deducted from it to arrive at a figure for Taxable Income.

    How much Taxable Income you have will determine to what percentage 20% or 40% you are taxed.

    Your Tax Liability is then calculated and from this is subtracted any tax you have already paid. The final figure is your Tax Due to be paid to HMRC (Tax Man)

    Once you have paid tax on your income you can spend it on whatever you want, such as:

    1. Your residential Mortgage
    2. Gambling
    3. Fast Cars
    4. Holidays
    5. Giving it all away to your best friend


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