![]() ![]() Repair work carried out on the property can be claimed provided that it is not a capital improvement. However, lenders do tend to charge a higher rate of interest on loans to limited companies. Higher rate taxpayers may wish to consider purchasing new properties in a limited company as finance costs are allowable in full. Where landlords are highly geared, the tax liability could be more than the net rental income received.īasic rate (20%) taxpayers should effectively receive full relief provided that the rental income before interest does not cause them to go into the higher rate of tax. This is how the finance cost is allowed:Īs you can see the effective rate of tax is 53.51% which is more than Joe’s marginal rate of 40%. As he has owned the property for some time, the outstanding debt on the property is relatively low. He has purchased a buy to let property as an investment. Joe is a teacher and is 49 years old he is a 40% taxpayer. The best way of explaining this is by way of an example: Prior to 6th April 2020 there was a phasing in of the restriction over three years. If it is a repayment mortgage, then it is only the interest element which counts as finance costs not the total repayments.įor commercial properties, Furnished Holiday Lettings (see above) and residential properties owned by limited liability companies, the finance costs are allowed in full.įor other residential properties owned by individuals or partnerships, from 6th April 2020, the finance costs are restricted and only 20% of the finance costs can be claimed against the tax liability on the net rental income after deducting all other expenses and losses brought forward but before any finance costs. The interest paid and arrangement fees on any loan taken out to purchase or improve the rental property together with any bank charges on a separate rental property bank account are finance costs. Here’s a list:įinance costs (restricted for most residential properties) The general rule is that the expenditure must be expended wholly and exclusively for the Rental Income business. ![]() So what are the allowable costs against rental income? So if you are thinking of buying a property and spend money instructing solicitors and arranging surveys and then decide not to proceed or worse still the seller pulls out, there is no tax relief for the costs. In short, any costs and expenses associated with a deal that falls through are never allowable. You should keep a record of all the costs together with the supporting receipts so that you can claim Capital Gains Tax relief for the expenditure when you sell. These can be deducted from the gain (or added to the loss) when you sell the property. Your solicitors’ completion statement should contain the majority of the costs ![]() We would advise you to prepare a simple statement of all the costs as follows:Īuctioneers costs (for those of you who have bought through auctions) The costs and expenses associated with the purchase are treated as part of the purchase price and cannot be set against rental income. Some expenditure may not be claimed as a deduction but is subject to special rules. Some expenditure may be deducted from rental income in calculating taxable income. Some expenditure is only allowable against the gain when you sell the property. Some expenditure never qualifies for any tax relief The common notion is that because you have spent money on your property, it automatically follows that you can set it off against your rental income. In particular, establishing the difference between a repair and an improvement and claiming only the mortgage interest not capital repayments on loans. Many landlords innocently misunderstand the difference between a CAPITAL expense and a REVENUE expense. It’s one of the most common questions we get asked and it’s understandable why. ![]()
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