How to maximise landlord’s tax relief on rental properties
IF you are letting property, then getting appropriate tax relief for any of the associated costs will be one of your concerns.
A qualifying loan on which you can claim interest relief could form the biggest single part of your tax deduction. You cannot claim the capital repayment element of loan payments, but you can claim the loan interest paid each year on the capital.
The most obvious loan is the one that you take out on the rental property itself as part of its purchase. However, you may also be entitled to interest relief on other loans. You can take out a personal loan for example to fund furnishings or repairs on the rental property.
Whatever the source, if the borrowings are not wholly for the purpose of earning money from the rental property then you may need to restrict the amount of interest that you claim. For example if you take out a £20,000 loan to fund both £15,000 worth of rental property maintenance, and a £5,000 holiday, then you would only be able to claim 75 per cent of the loan interest against your rental income.
It is the purpose of the loan that is important. You can also receive tax relief on a re-mortgage on your own home for instance, if the purpose of the loan is to fund your rental property. You should consider the possible risk to the roof over your head though on such arrangements, and if possible the safer thing would be to arrange loans on the rental property itself.
Taking out a loan on a rental property does not itself automatically grant tax relief on it though. If you re-mortgage your rental property to fund an extension to your own home, there is no “business-purpose” to the loan and there would be no tax relief available.
Conversely if you start to rent out what was your own home, then the interest payments from the date of the rental would be allowable (though you should contact your mortgage provider and insurer for such a change in occupation). In some circumstances a landlord can withdraw their own capital from a rental business and replace it with a loan which then qualifies for interest relief.
If you realise that you have been paying qualifying loan interest, but haven’t included it on your tax return before then there is still scope to claim back some of the previous payments. The latest year that you can go back to now is to the period 6 April 2008 to 5 April 2009. See your professional adviser if you think this may be the case, as a claim for that year must be made by 5 April 2013.
If after deducting your expenses you find that you have made a loss against your rental income on a property in any tax year, you can try to relieve your loss.
If you have other rental properties that have made a profit, then you can set the loss against those profits from the same tax year. If you still have an overall loss, or if you have no other properties, then the loss is carried forward to set against any rental profits made in the next and subsequent tax years.
Unfortunately, you cannot set property losses against your non-rental income such as employment. So, property losses are ring-fenced only to be used against rental profits. If you have furnished holiday lettings however, then different rules may apply.
If you have just started, or are about to start letting a property, you should also remember your obligations to inform HMRC of the income. If your first rental property has only started in this current tax year (year to 5 April 2013), a tax return will not be due to be filed with HMRC until between 6 April 2013 and 31 January 2014.
Existing landlords already in self assessment will need to file their personal tax return for the tax year ended 5 April 2012 by the end of January 2013 at the latest.
Rob Durrant-Walker is a tax consultant with Chartered Accountants Garbutt & Elliott. He can be contacted via email rdwalker@garbutt-elliott. co.uk or by telephone on 01904 464100.