Buy-to-let: financial costs and deductions

It seems that every year at the moment, landlord taxes and costs are on the rise. As such, it’s absolutely vital that you:

a. Are aware of the costs you’re going to incur through owning investment property and ensuring you meet your legal obligations
b. Understand your tax liabilities, and
c. Are working with the right advisers to mitigate those liabilities as far as possible.

So, with less than three months to go until the end of the current tax year, here’s a round-up of the key financial costs and deductions that landlords need to consider for 2018/19, as well as the changes that will apply for the next tax year, beginning on 6th April 2019.

Potential cost of the ban on tenant fees in England

Now that the Tenant Fees Bill 2017-19 has reached the stage of a final reading in the House of Lords, we should expect a ban on tenant fees to come into force in England soon. And when agents and landlords are unable to continue to charge tenants for the initial referencing and administration of a let, this is money self-managing agents won’t be able to secure and some agents may look to increase management charges. Check with your agent to find out if their prices will remain the same or how much they will increase, do remember though, their charges are tax deductible.

Property costs

As efforts to raise the standard and condition of rented properties continue, landlords are naturally having to spend more each year on making sure they remain legally compliant. If you are an HMO landlord, your costs may have already increased this financial year, when mandatory licensing changes came into effect in October for properties housing five or more people, forming more than one household, regardless of the number of storeys.

For 2019, the Homes (Fitness for Human Habitation) Act 2018 comes into force on 20th March. While there are no specific immediate costs to landlords, the Act does mean new terms in tenancy agreements from this date will state that the property must be fit for human habitation at the start of any lease and will remain so throughout the tenancy.

The other thing that is likely to come into force this year is mandatory electrical checks every five years. While many landlords already do this as a matter of course, if you haven’t had the electrical system in your property checked in the last five years, it is worth budgeting for an electrician to carry out an inspection as soon as possible, so you are aware of any works required to continue to let the property legally.

Remember that quite a lot of the general costs you’re likely to incur in the course of being a landlord should be tax-deductible. You will need to check with a tax specialist, but the list is likely to include:

• • Gas & electrical safety certification
  • Utility costs and council tax
  • Insurance, including building, contents and rent guarantee
  • Advertising if self-managing
  • Administration costs, e.g. stationery and postage
  • Travel expenses related to the business, such as mileage
  • Letting agent fees
  • Landlord & property licences
  • Inventory costs
  • Cleaning services
  • Replacement of furnishings 
  • Professional fees, e.g. bookkeeper or accountant

Your personal tax allowance

For 2018/19, the personal allowance is £11,850 - so you will only pay tax on earnings above that threshold – and it is rising to £12,500 for 2019/20. However, this allowance does go down by £1 for every £2 of income you earn over £100,000, so if your income is above £123,700 for this year’s return, you won’t get any personal allowance at all.

The 40% tax rate threshold

As announced in the 2018 Autumn Budget, the higher-rate threshold is rising again, from £46,350 for this tax year, to £50,000 for 2019/20, above which, income will be taxed at 40%. The 45% tax threshold remains unchanged, applying to earnings over £150,000.

Third phase of withdrawal of mortgage interest as an allowable expense

For 2018/19, only 50% of the mortgage interest amount can be deducted from your rental income, with the remaining 50% subject to tax relief at the basic rate of 20%. 2019/20 sees the third phase take effect, when only 25% can be deducted as an allowable expense. Then, from April 2020, the whole amount of mortgage interest will simply be subject to basic-rate relief at 20%.

While basic-rate tax payers are unlikely to notice any difference to their bottom line, unless this change pushes you into a higher tax bracket, if you’re in the 40% or 45% band and have a high level of borrowing, you should already be budgeting and planning for the impact on your profits and tax bill over the next couple of years.

Capital gains exemption amount and reductions

If you sell an investment property, you are liable to pay tax on the increase in value since it was purchased, but you do get an exemption amount, a similar principle to the personal allowance. For 2018/19 you won’t pay tax on the first £11,700, which is rising to £12,000 for 2019/20. Above that, CGT is payable at 18% in the standard tax band and 28% in the higher-rate band.

You should be able to deduct certain expenses from your gains, including:

• Any estate agent’s fees
• Legal fees and costs
• The stamp duty you paid when you bought the property.

And there may be more you can do to reduce your liability, so do speak to a property tax specialist to make sure you’re taking advantage of all the allowable deductions.

Tax deadlines for your diary:

For your 2018/19 return
31st January 2019 1st payment on account for 2018/19
5th April 2019 End of 2018/19 tax year
6th April 2019 Start of 2019/20 tax year
31st July 2019 2nd payment on account for 2018/19

For your 2019/20 return
5th October 2019 Register online for self-assessment, if you haven’t already
31st October 2019 Paper tax return filing
31st January 2020 Online tax return filing & payment of any tax owed for 2018/19