If you were to tally up your rent collected for the year and pay a flat percentage of that, you’d be missing out on some of the tax benefits of being a landlord. There are many allowable expenses that are the result of performing your duties as a landlord that enable you to reduce your taxable income.
But first, a note on mortgage relief: Starting in April 2017, the government began to phase out your ability to deduct mortgage expenses to reduce your tax burden on rental income. The system that replaced this now gives you a tax credit equal to 20 percent of your interest payments on your mortgage. See the embedded video below for a more detailed description of how this works.
But there are still many other expenses landlords can claim in order to reduce their taxable income. The government defines these as expenses that are exclusively made for the purposes of renting out your property. Allowable expenses include the following.
Maintenance and repairs. You can deduct the costs you pay that keep your tenants safe and comfortable. Notably, non-essential improvements and redecoration are not included, such as remodelling kitchen countertops or upgrading light fixtures.
Utilities and other bills. If you pay utilities on the property, you can deduct these expenses. Typically the tenant pays most utilities but there are situations where landlords opt to do this themselves.
Landlord insurance. If you purchase landlord insurance for the building, its contents, and/or public liability insurance, this can be deducted from your taxable income.
Maintenance services. For example, hiring gardeners, cleaners, or repairpeople, as long as they are acting in service of making the property liveable.
Letting agents and accountant fees. If you use the services of a letting agent and/or an accountant in managing the property, these costs can be deducted.
Advertising costs. When seeking out new tenants there are costs involved in advertising the property, which can usually be deducted.
Miscellaneous costs. Costs that are essential in operating your property business can be deducted. This might involve stationery, phone bills, and vehicle costs.
The government prohibits you from deducting items such as mortgage payments (see above for more information), private telephone calls, clothing, and any other personal expenses.
The particulars of tax law and the specifics about what costs are allowed to be deducted can be overwhelming. Should you wish to file taxes on your own, the government does have some resources available to file your self-assessment return, such as videos and webinars, toolkits to help determine your tax burden, and the HMRC community forums where you can ask questions and see responses from like-minded people.
There are also a number of online services that can help you file your taxes correctly. These have the advantage of ensuring a proper self-assessment and maximising your allowances at a lower cost compared to an accountant. The Sharehouse trust partnership network can help connect you to the right service that will help you minimise your tax burden.
Finally, hiring the services of a professional accountant will guarantee someone is working in your best interest. A qualified accountant will be aware of the latest nuances of tax law and will become an advocate for you in reducing your tax burden and maximising your income. The downside is the higher cost in accountant fees, but if you manage multiple properties or your sources of income are complicated, hiring an accountant is essential.
There is no way around paying taxes as a landlord. But understanding the nature of your tax burden and the ways you can reduce it will get you a few steps closer to realising your ideal tax situation. Stick with Sharehouse for the latest tips and current best practices.