April 28, 2024

How to Reduce Your Rental Property Tax Bill

How to avoid paying tax on rental income

Being a landlord has its merits, and can be profitable if approached in the right way. For those looking to maximise their rental property earnings, there are various strategies that can help, from optimising yield to reducing void periods.

One other tactic to get the most out of your rental income as a landlord is to take advantage of legal ways to reduce your tax bill.

In this post we’ll be looking at how to avoid paying tax on rental income, courtesy of a series of actionable, allowable strategies that every landlord can implement.

First things first – what is rental income tax?

All landlords are expected to pay tax on their income from any properties they rent out for profit.

Whether you are a professional buy to let investor operating a rental portfolio as your main income, you are renting out a property as part of your pension plan, or are an ‘accidental landlord’ having inherited a property, you will need to account for tax liabilities.

As such, it will be your responsibility to ensure your end of year tax returns are submitted on time, and that any taxes due are paid by the relevant date stipulated by HMRC.

How to avoid paying tax on rental income?

The question, how to avoid paying tax on rental income, is probably better rephrased as, how to reduce your rental property tax bill. In a few cases, it may be possible to avoid paying tax on rental income altogether, but that would depend on how your income stacks up against your expenditure.

In most cases, however, there will be a tax liability. However, there are ways to reduce that tax liability so that the amount payable is reduced as much as possible.

Maximise deductible outgoings

Minimising tax payable always begins with maximising deductible expenditure.

A range of expenses can be deducted from rental income. These include:

  • Property taxes
  • Insurances
  • Repairs and maintenance
  • Utilities
  • Ground rent and service taxes
  • Mortgage interest
  • Property management fees
  • Legal and accounting fees
  • Advertising and marketing
  • Travel expenses associated with the rental property

If you wish to offset any of the above expenses against your tax liability, then you are going to need to keep detailed records and receipts.

For those landlords with multiple properties, it may be possible to use deductible expenses from one to offset against another.

This, however, is something that will need professional guidance from a financial or tax specialist to ensure all expenses are identified and handled in the correct way.

Claim mortgage interest tax relief

In April 2020, the law around mortgage interest claims for landlords changed. Since then, it has not been possible to deduct all mortgage interest payments from the rental income.

Instead, the finance costs for the property must be calculated in such a way to factor in the business use of the property, so that the correct deductible amount can be applied.

These changes prompted a number of landlords to restructure the way they operate their property business. Some have become limited companies so as to reduce the increased tax liabilities and pay Corporation Tax instead.

However, this strategy won’t necessarily be right for everyone. So again, taking professional advice is crucial to ensure the correct amount of tax is paid, and that regulations are adhered to.

Deduct property management fees

Whether you manage your own property or properties, or you hand the responsibility over to an agent, you will be able to claim tax relief on property management costs.

Property management fees that can be claimed as expenses include:

  • Tenant sourcing and referencing
  • Day to day tenant management
  • Property inspections / inventories
  • Property marketing
  • Rent collection

Again, be sure to keep detailed records of your expenses.

Property maintenance and repairs

When considering how to avoid paying tax on rental income, it is useful to know that expenses for genuine property maintenance and repairs are fully tax deductible.

It is important, however, to ensure that ‘maintenance and repairs’ are just that: work that restores the property to its original condition, without increasing its value.

If the work does increase the value of the property, then it won’t be fully tax deductible.

Direct services to tenants can also be claimed as expenses, for example, garden maintenance, cleaning and pest control.

Items that need replacing regularly, such as kitchenware and linen, if provided, will also usually be subject to Replacement of Domestic Items Relief.

Ownership structuring to help reduce tax on rental income

One of the most helpful strategies when looking at how to avoid paying tax on rental income has to be ownership structuring.

Setting up as a limited company has become a popular tactic for landlords, as it can in some cases offer various financial benefits.

As a limited company, a landlord is protected from personal Capital Gains Tax, as well as personal financial liability. Making a rental business into a limited company can also offer benefits around income tax management, as it provides for greater flexibility in distributing profits.

However, this strategy is not for everyone. Taking professional advice is crucial, because the tax implications may not always be favourable. Future investment plans, the costs of running a limited company and the statutory responsibilities that go with it must all be given due consideration.

Making use of tax bands and allowances to reduce rental income tax liabilities

A landlord’s net rental income forms the basis for the tax liability calculation. Net rental income is the total rental income after all allowable expenses, reliefs and allowances have been applied.

Everyone has a tax-free allowance dictated by their tax code. This allowance permits landlords to receive part of their rental income without having to pay any tax on it.

For those landlords with an additional income, perhaps from a salaried job or directorship, it is important to be strategic about tax band management.

A professional tax adviser will help you arrange your finances so that you remain within a lower band, avoiding higher liabilities.

How best to manage costs as a landlord?

As well as looking at how to avoid paying tax on rental income, landlords seeking to keep their costs down and maximise their profits may consider a guaranteed rent scheme.

Not only do such schemes remove the need for tenant sourcing and day to day management, they also eliminate the constant worry of rent being paid on time, and eradicate the problem of costly void periods.

This is because for the duration of the agreement, the landlord is paid an agreed rent every month, regardless of whether the tenant is up to date with their payments, or whether the property is occupied.

Further benefits come in the shape of an all-in service, where maintenance and repairs are included in the deal. This further reduces landlord costs, especially those that are unexpected and can often be a challenge to deal with.

At City Borough Housing, we offer a guaranteed rent scheme with no hidden costs. What you see is what you get, and our service includes a full professional property management service, maintenance and repairs, regular property inspections and the property returned at the end of the agreement in its pre-let condition, allowing for fair wear and tear.

To discover more about how our guaranteed rent scheme works, and to request your free, no-obligation property valuation, please get in touch.

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