Q I am considering buying a buy to let property. I am interested to know what expenses I can deduct from rental income and in particular mortgage costs. I also anticipate that I may have a loss in the first year as there is likely to be quite a bit of outlay in year one; what is the position with tax relief on losses?

A Expenses fall into two categories: Revenue – these expenses can be deducted from your rental income for tax purposes assuming they are incurred wholly and exclusively for the purpose of the rental business and are not of a capital nature; and Capital – these expenses are only taken into account for tax purposes when you sell the property. Such expenditure includes the original cost of the land and property and any improvements and alterations.

It is not always straightforward determining whether a particular cost is revenue or capital but as you can save significant amounts of tax if big cost items are categorised as revenue, it is worth considering whether the costs can be justified as revenue.

The most tax efficient way to finance a rental property will depend on your circumstances. However, it is worth remembering that you can get tax relief on any interest you pay on borrowings used for a rental property, whereas there is no mortgage interest relief for your own home.

You may be able organise your borrowings to ensure you get maximum tax relief.

If your rental business is loss making, the losses you make can be rolled forward until you start making a profit. When your business does make a profit you can then offset the losses from earlier years against the profit.

To benefit from losses in future years you must notify HMRC of the losses and this must be done by completing a Self- Assessment tax return.

Examples of revenue expenditure normally allowable for tax:

 

  •  Accountancy fees for preparing our rental business accounts;
  •  Advertising and marketing costs;
  •  Bank charges;
  •  Cleaning;
  • l Council tax when the property is available for letting but not let;
  •  Gardening;
  •  Safety certificates;
  •  Ground rent;
  •  Insurance;
  •  Interest charges on loans used to improve or build properties;
  •  Letting agent fees;
  •  Maintenance charges;
  •  Mortgage interest charges;
  •  Repairs not providing a significant improvement to the property;
  •  Gas and electricity;
  •  Telephone calls made in relation to the property;
  •  Travel costs where the travel is solely for the rental business;
  •  Water rates.

     

    Warren Shute - chartered financial planner