Tax changes and successive coronavirus lockdowns have made the life of a landlord challenging of late. And compounding these challenges, is the fact that many landlords may be missing out on valuable tax breaks. If you’re wondering: ‘buy to let: is it worth it?’ we’ve outlined some tax reliefs you might not be aware of and how to make the most of them.
Buy to let allowable expenses
As a landlord, you can claim back the cost of travelling between your rental properties. And phone calls in connection with your properties. It might seem a lot of effort to track these small expenses but if you are paying tax at 40 or 45% it’s definitely worth it.
Expenses must be wholly and exclusively for the purposes of renting out the property to be considered as tax allowable. Details of other tax allowable expenses, including some legal fees, can be found here; along with a list of non-allowable expenses.
Buy to let, is it worth it? Well, by deducting more of these allowable expenses from your income, you could make a real difference in the tax owed but there are also other savings to be had.
Offset Coronavirus losses from buy to let
For some tenants, coronavirus resulted in missed rental payments which then impacted landlords. If you have made a loss in the last tax year, you can carry this forward and offset it against next year’s tax bill.
If, for example, you made a loss of £2,000 this tax year but turn a profit of £10,000 next year, you will pay tax on £8,000 instead.
But please note that if you have more than one property, the property portfolio as a whole must have made a loss, not just one property from within the portfolio.
A vacant buy to let property?
If you were unable to find tenants for a period during the pandemic, you should be able to claim back council tax and your utility bills for that period. When you complete your self-assessment tax return, don’t forget to include this information or let your accountant know, if they are completing the tax return on your behalf.
Make buy to let worth it with a holiday let
We’ve championed the tax benefits of the holiday let and furnished holiday let before. And it seems they remain a good option. For ordinary BTL’s you now only receive a tax credit for 20% of your mortgage interest.
If you convert a BTL into a holiday home you can still offset all your mortgage interest against your tax bill. And when you come to sell the property, you will benefit from a Capital Gains Tax (CGT) rate of 10%, compared to 28%.
To qualify, homes must be furnished, available to rent as holiday accommodation for at least 210 days a year and occupied by a tenant for at least 105. The property cannot be occupied by long-term tenants – those who stay for more than 31 days – for more than 155 days per year. You can find more detail on the Government’s requirements for holiday lets here.
Pension tax relief for buy to let
There is another advantage to holiday lets. Profits can be treated as income for your pension contributions. So, you can then claim tax relief at your marginal rate on additional sums you invest into your pension.
As pension contributions attract marginal rate income tax relief you could bring your pre-tax income down into the 20% lower band. No-one likes to pay tax at 40% if it can be avoided.
This is not possible for a normal buy-to-let as the income is treated as unearned income. So there’s another positive chalked up for holiday lets.
Buy to let, is it worth it?
So, buy to let, is it worth it? We believe that where possible BTL property should form a part of any investment portfolio. The continuing shortage of properties in the UK should ensure that values and rents continue to rise steadily over the longer term. Assuming the mortgage is kept the same then the equity in any BTL should increase over a period and result in considerable gains when eventually sold and realised.
When you do come to sell, it’s advisable to speak to an accountant that understands the buy-to-let market and can make sure you pay the right amount of Capital Gains Tax – but that’s a subject for a different article.
About Liz Cordell
I’m an experienced copywriter, with a great attention to detail. Having previously held positions at a global publisher, a top 100 law firm and a Big Four professional services firm, I now work with clients across a range of industries. Whether it’s new content for a website or creating interesting blogs for my clients, I can create engaging copy that doesn’t take a lifetime to read.