How to max­imise land­lord’s tax re­lief on ren­tal prop­er­ties

Yorkshire Post - Property - - PROPERTY - Rob Dur­rant-walker

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.

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