Accounting for landlord taxes is often hard because it is always changing and being updated. There are different tax rules for landlords who let out their properties. Employing the services of a property accountant will make sure that you pay the right amount of tax and will help to run your property business as efficiently as possible from a financial point of view. Landlords have been unable to deduct mortgage costs from their rental income to lower their tax bill since April 2020 under the Section 24 tax changes under the 2015 Finance Act. Instead, there is a tax credit equal to 20% of the interest paid on the mortgage. If you have a loan on your property, you should read the government's advice on tax relief for residential landlords, which includes some helpful case studies.

The government gives a number of examples of things that can be bought with this tax relief, which are:

  • Replacement beds, sofas, carpets, curtains
  • Replacement cutlery or crockery
  • Replacement fridges, washing machines, tumble dryers

However, you can only ask for a replacement of the same kind, eg if you bought a new fridge for £600 but only had to pay £400 to replace your old one with a similar one, you could only get £400 back. You can also claim the costs of getting rid of things (usually electrical goods).

The costs of advertising and letting out the property, as well as fees for reference checks and setting up the tenancy agreement, are tax deductible. So are the fees you pay a letting agent to manage the property for you. As a general rule, you can deduct costs that are "wholly and exclusively for the purpose of renting your property." Revenue expenses have to do with how the property is run day-to-day, while capital expenses are used over a longer period of time, like when the property or its contents are upgraded or new ones are added. You should keep track of these costs, because if you sell your home in the future, you may be able to use them to lower your Capital Gains Tax bill.

Expenses you can deduct against your rental income:

  1. Cleaning, upkeep, and fixing: Costs of general maintenance and repairs can be deducted from your taxes. But you can't get money for upgrades to the property, you can only get money for work you did to get it back to how it was before.
  2. Bills: You can deduct the full cost of bills like water rates, electricity, gas, and council tax, but only if you pay them.
  3. Insurance: You can also write off the cost of your landlord insurance on your taxes. The main types of landlord insurance are buildings, contents, liability insurance and rent guarantee insurance. Rent guarantee insurance usually covers the costs of repossession and eviction proceedings if they are needed, as well as the lost income from rent payments that were not made.
  4. Services: Some places need more maintenance than others. The services of a gardener, cleaner, exterminator, or handyman can be deducted from income, as long as you pay them directly and the work they do is for the benefit of the tenants.
  5. Letting agent and management fees: Many landlords choose to use an agent to rent out their property. These fees can be deducted from your taxes, as can the fees you pay to have an agent take care of everything about your property.
  6. Costs for accountants: When it comes to your Self Assessment, one of the most important decisions is whether to hire an accountant or do it yourself. Even though good accountants aren't cheap, at least their fees can be deducted from your taxes. The same goes for legal fees, as long as they are for rentals of a year or less or the renewal of a property lease for less than 50 years.

Dealing with VAT on rental expenses

When the letting agent pays for something and then passes it on to you, it is important to know if the cost is a disbursement or a recharge:

A disbursement is a payment made to a supplier on behalf of a customer. This would be the case, for example, if the letting agent arranged for a plumber to fix a shower in a rental property and paid for the repair on behalf of the landlord, passing the cost on to the landlord. The letting agent doesn't have to add VAT to the cost of the disbursement when they pass it on to the landlord because the landlord is the one who gets the service, not the customer.

For a payment to be a disbursement, all of the following must be true:

  • the letting agent paid the supplier on behalf of the landlord and acted as the landlord's agent;
  • the landlord received, used, or benefited from the goods or services paid for on their behalf;
  • it was the landlord's job to pay for the goods and services, not the letting agent's;
  • the letting agent had the landlord's permission to make the payment;
  • the landlord knew that the goods and services were from a different supplier than the letting agent;
  • the costs are listed separately on the statement or invoice;
  • the exact amount paid to the supplier is given to the landlord;
  • and the goods and services paid for by the letting agent are given to the landlord.

On the other hand, a cost that the letting agent pays and then passes on must be added to the VAT that you pay. This will be true for the letting agent's fees and expenses. The letting agent can get back any VAT they spent on these costs, but they have to add VAT to the amount they charge you.

One way to deal with your tax liabilities could be to give the property to a partner who earns less income or at least transfer some or all of the income through a legal Partnership arrangement that has been approved by HMRC. If a landlord's spouse or partner pays only basic tax or no tax at all, then transferring property can cut the tax on rental income by a lot.

Transferring your property to a limited company is another way to get around Section 24.

This can be helpful because Section 24 doesn't apply to limited companies, and 100% of mortgage interest can be deducted from taxes as a business expense. Rental income from properties owned by a limited company is taxed at the current rate of corporation tax, which is 19% right now. This is a lot less than the 40% tax rate for the higher band.

As a company director, you can choose what to do with the company's profits. You can invest in more buy-to-let properties, add to your pension, or pay out the profits through tax-efficient dividends. This flexibility can help you plan your taxes better than if you owned the property personally. When it comes to planning for inheritance tax, having property in a company gives you more options. If you want to give your business to your family someday, it is much easier to do so with a limited company than with privately held property. Since the property would still belong to the company in this case, it could also be safe from stamp duty, inheritance tax, and capital gains tax.

Be mindful, however, that if you already own the property or properties, and you ‘sell’ to the limited company, you may have to pay stamp duty and capital gains tax. This is because the law is changing who owns it. Also, if you take the money out of the business, you could be taxed again. You can get £2,000 in dividends without paying tax (from just one limited company). After that, the tax rate ranges from 8.75% to 39.35%.

When you set up a limited company, you'll have to think about the costs involved such as preparing accounts, fees for filing corporation tax at Companies House, legal fees, and auditing services if needed. Lastly, it can be harder for a business to get a mortgage. Many mortgage lenders charge slightly higher interest rates and fees for buy-to-let mortgages for limited companies than they do for buy-to-let mortgages for individuals and, not all buy-to-let lenders will give mortgages to limited companies, and the ones that do tend to have a smaller selection of products.

An accountant can help you figure out if setting up a limited company is the best way to go for you. Setting up a Limited company could be a great way to grow an investment over a long time. This is because limited companies have tax breaks built in.

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