What Tax Relief Is Available For Landlords?
Even though UK landlords can no longer deduct mortgage interest under recent tax rule changes from the Government, the average landlord still managed to claim almost £7,000 in tax breaks last year. Since the Government tightened tax rules for residential landlords, buy-to-let property owners claimed more expenses to offset losses due to the recent tax changes.
Previously, landlords could deduct mortgage interest from their rental income. Still, despite no longer being able to offset their mortgage interest costs fully, they can now claim a 20% tax credit for their mortgage interest instead. Although they can still offset any necessary property repairs and maintenance costs, letting agent fees, accountancy fees and landlord insurance against tax.
UK rates of landlord tax relief rose to £18.5billion in the 2020/21 tax year, up from £18.1 billion the previous year. The increase in tax relief happened despite a reduction in the amount of tax relief landlords can claim on mortgage interest. This is why landlords need to understand tax relief and how much they are entitled to.
Is there tax relief for landlords?
One of the most commonly claimed tax reliefs for residential landlords outside mortgage interest payments is household repairs and maintenance. But with the new EPC rules being brought in, landlords now need to ensure their buy-to-let properties are as energy-efficient as possible to meet new legislation.
But landlords face a dilemma over whether they can claim energy improvements against tax and what is considered an improvement or a repair. Landlords can deduct repair and maintenance costs, but they cannot claim the costs for any improvements made to the property that may increase its market value.
While meeting new EPC ratings may require landlords to improve their buy-to-let properties rather than maintaining them at their current level, the boundaries are blurred. They may need more clarification from Government in the near future.
Currently, landlords can claim these allowable expenses:
- 20 per cent tax credit on mortgage interest
- General maintenance and repairs to the property, but not improvements (such as replacing a laminate kitchen worktop with a granite worktop)
- Water rates, council tax, gas and electricity
- Insurance, such as landlords’ policies for buildings, contents and public liability
- Costs of services, including the wages of gardeners and cleaners
- Letting agent fees and management fees
- Legal fees for lets of a year or less, or for renewing a lease for less than 50 years
- Accountant’s fees
- Ground rents and service charges
- Direct costs such as phone calls, stationery and advertising for new tenants
- Vehicle running costs (only the proportion used for your rental business), including mileage rate deductions for business motoring costs
An example of a like-for-like repair would be replacing an old broken-down boiler with a new one. However, with a push from Government for people to adopt more eco-friendly heating options such as heat pumps, it may be seen as acceptable to replace an old gas boiler with a new heat pump heating system.
All rental properties in England and Wales need to have an energy performance certificate rating of at least E in order to be let, unless they are exempt. EPC is a rating scheme which bands properties between A and G, with an A rating being the most energy efficient and G the least efficient.
The Government is looking at bringing forward the requirement to a C rating for all new tenancies by 2025 and all existing tenancies by 2028. This means landlords will need to ensure that their buy-to-let properties have an adequate loft, underfloor or cavity wall insulation, upgrade to double or triple-glazed windows and replace outdated heating systems for more eco-conscious options, which will all help to boost an EPC rating.
There may be further tax incentives for landlords coming soon, including insulation and heat pumps. More tax incentives may be needed if the government hopes to meet its net-zero targets.
Landlord mortgage interest tax relief
The most common tax relief for landlords in the past was being able to claim back their mortgage interest payments, but this started to be phased out in 2017 and was stopped in April 2022. Tax relief on mortgage interest for landlords has now been changed to a tax credit system where landlords are eligible to receive a tax credit payment based on 20 per cent of their mortgage interest payments.
Although the 20 per cent tax credit is a reduced amount compared to what could be claimed back before the tax rule changes, it can still greatly help landlords to reduce their overheads.
So, what can landlords claim tax relief on besides mortgage interest payments? And what tax relief can I claim as a landlord?
Tax relief for residential landlords
As costs to residential landlords are increasing because of new legislation for their properties to meet EPC requirements, buy-to-let landlords will inevitably consider claiming back any costs they can to offset their expenses.
The most significant proportion of tax relief to be claimed is still the 20 per cent tax credit, as mentioned above and makes up 37 per cent of all tax relief claimed. However, buy-to-let property repairs and maintenance costs come in second place, with almost one-quarter of the total tax relief claimed.
Landlords can also offset professional fees they pay for the ongoing management of their buy-to-let property, such as letting agent fees, accountancy and legal fees.
But landlords can also claim tax relief for various associated costs, such as property insurance and landlord insurance. Leasehold landlords can claim against ground rents and service charges that are part of owning and maintaining leasehold property.
Residential landlords that choose to pay council tax, power and water charges for tenants can also claim back these costs, which is helpful for landlords that let out multi-occupancy property.
Tax relief and income tax
The changes to tax relief that came into effect on the 6th of April 2022 means that tax relief is now restricted to residential property finance costs to the basic rate of income tax. This will affect you if you are:
- an individual UK resident who lets residential properties in the UK or overseas
- an individual non-UK resident who lets residential properties in the UK
- an individual who lets residential properties in partnership
- a trustee or beneficiary of trusts liable for Income Tax on residential property profits
Although the tax relief changes affect all residential landlords with finance costs are affected, only some will be liable to pay more tax.
You will not be affected by the finance cost restrictions and will continue to receive relief for interest and other finance costs in the usual way if you are a:
- UK resident company
- non-UK resident companies
- landlord of Furnished Holiday Lettings
Landlords have a lot to consider in today’s changing property environment. While investing in property is still the best way to generate income long-term, anyone purchasing a buy-to-let property needs to keep up with changes in Government regulations.
While the changes to tax relief on mortgage interest payments have hit some landlord’s hard, there are many other ways to gain tax relief on your costs while meeting all your compliances as a landlord.
Our team of business insurance experts is committed to helping you navigate the complexities of policy terms and conditions.
Protect Your Business Today!
Find comprehensive business insurance at the right price. Quickly and easily compare quotes from leading insurers and choose the perfect policy for you.Compare Quotes