Landlord Tax: Everything you need to know about allowable expenses
The Landlord Tax Return Survival Guide
There’s an annoying reality about tumultuous times: even through all the chaos, the regular stuff keeps on coming the same as before. Case in point: the good old tax return.
Handling financial responsibilities properly has always been important, but if ever there were a time to ensure you aren’t stung by a late charge or a fine, it’s now. And the same goes for making sure you aren’t paying more than you owe.
Tax and landlords aren’t always a simple mix and we hear so many tricky tax questions from you, like:
- What counts as an allowable expense?
- What even IS an allowable expense?
- And what happens when rent isn’t your only stream of income?
It’s a perennial talking point in our private Mashroom Landlord Community.
That’s why we sat down with Richard Cunningham, a Chartered Accountant and Chartered Tax Advisor. We asked him the most common questions about tax.
Our chat with Richard is part of the new-look Mashroom Show, the place to come for landlords who need help and advice with insurance, tenant finding, mortgages, rent collection – and a whole lot more. Each show is packed full of valuable stuff, and in this show summary we’re also covering:
- An update on what’s going on in government and how the property industry is affected
- A new landlord licensing scheme in the London borough of Redbridge
- New product alert: comprehensive Rent Collections Plans
- The latest stats from the legal system: evictions and mortgage possessions
- Winter is coming: is your insurance ready?
But first, let’s talk about tax, baby.
Income Tax and Allowable Expenses with Richard Cunningham
Tackling the annual tax return can feel daunting, for landlords of all kinds. We know as well as you do that the role comes with an array of different expenses – but which of those costs can you write off? And how can you avoid making some common (and costly!) tax return mistakes?
Let’s get really basic for a moment. What even is income tax?
‘Very simply, the tax you pay on your earnings, on your profits,’ Richard clarifies. ‘For instance, tax on income from self-employment, employment, rental profits, or dividends on investments.’
I became a landlord recently, alongside my day job. Will employment affect how much tax I pay on my rental income?
The short answer is yes, says Richard. ‘The day job is taxed under the PAYE system, so your tax gets deducted at source and you don’t have to worry about tax returns for the day job.’ But being a landlord means a new yearly task: ‘You have to complete a tax return and all your income is effectively aggregated to calculate the tax you owe.’
Does being a landlord affect my personal allowance?
When it comes to personal allowance, income from rent isn’t special, but it’s worth being aware of how your level of earnings is taxed, and how rental income could affect this level. Earnings over a certain level are taxed at a higher rate – the government has just announced changes in tax thresholds, so it’s worth checking your situation against the latest rules.
Why are allowable expenses so important when doing a tax return?
‘Certain costs you incur as a landlord can be deducted from rental profits to help reduce your tax bill,’ Richard explains. ‘Potentially, things like gardening, cleaning, insurance, repairs, maintenance, and fees for agents, accountants and lawyers can be allowable expenses.’
Richard gets a lot of queries to do with repairs and maintenance because landlords aren’t always sure what counts as an allowable expense and what doesn’t. ‘It’s pretty common-sense,’ Richard assures us. ‘Say your tenant leaves and the house needs repainting, that’s allowable. But if you decide to put an extension on the property, or install a security system where there wasn’t one before, that’s capital, so you’re not going to get a deduction on that for your income tax.’
How can landlords avoid common tax return mistakes?
‘The most regular mistake I see is one we’ve already discussed: mistaking capital expenditure for allowable expenses,’ Richard says. But there are a couple more stumbling blocks he wants landlords to know about:
- Mortgage interest calculation errors: ‘Historically you could deduct all the mortgage interest from your taxable income, but those rules changed five or six years ago. What happens now is you get a basic rate deduction for your mortgage interest.’
- Misusing losses on uncommercial lets: ‘Usually, if you make a loss you can roll that loss forward and offset it against future profits. However, Richard explains, if you make a loss while you’re renting it out to family, you can’t, because the arrangement counts as an uncommercial let.’
What happens if a landlord makes a mistake or tries to play the tax system?
‘If Inland Revenue decides you’re at fault you’d pay the tax you owe, plus interest for the late payment, plus a penalty. The size of the penalty depends on how deliberate they think the issue was.’
If I only have one or two properties, is it worth having an accountant?
If you’re not sure whether you need an accountant, Richard’s advice is to sit down with a chartered accountant or chartered tax advisor. ‘They will typically give you a free half hour to talk through your affairs, and more often than not, if they think you don’t need their services they’ll tell you.’
How can landlords save themselves from a tax headache?
Richard’s top three points for a pain-free tax return process are:
- Declare all the income you’re receiving.
- Have a chat with an accountant.
- Keep good records.
Cool, Calm, Collected: Is a Rent Collection Plan for You?
As many of you already know, we’re a sociable lot, and we love connecting with landlords anywhere and everywhere, from Facebook to TikTok to good old phone and email. And frankly, what’s the point in all that if we aren’t going to try to improve the support out there for landlords?
Our Sales Director George Sinclair is excited to tell you more about what we’ve been cooking up: our brand new Rent Collection Plans.
What’s a Rent Collection Plan?
‘It’s an exciting new product that we’ve just brought to the market,’ George says. ‘We reached out to thousands of landlords to find out what they actually wanted, we listened to their feedback, then created the products.’
And George hopes it’s a bit more hands-on than other products out there. ‘Most landlords have some trouble at some point with rent payments, so with a Rent Collection Plan you have someone in the middle who can help by chasing up the tenants.’
‘Landlords also wanted to know that if something went wrong they’d have protection, so we’ve built that in too,’ George adds.
What are the two plans like?
- The first product is set at 2% of monthly rent. Within that, you have your rent collection service, so Mashroom is on hand to chase your tenants. You also have legal cover.
- The second product is set at 5% of monthly rent, and it includes everything in our 2% package, along with home emergency insurance and rent guarantee insurance.
Can landlords manage rent collection themselves?
Absolutely. George says: ‘There are lots of ways to conduct your property portfolio and Mashroom is never going to tell anyone how they should do it. You can do it yourself, and we’ll still be here for anything we can help with in the future.’
How is a Rent Collection Plan different from using a lettings agent?
‘Now, once upon a time I was a high street lettings agent, so I feel within my rights to give both sides of the story here,’ George says. ‘Typically, high street agents charge between 8% and 15%, and then you still have to buy insurance on top of that. With Mashroom’s Rent Collection Plan you pay your 2% or 5% and you’ve got everything included.’
To find out more or have a chat about Mashroom’s Rent Collection Plan, simply email George at firstname.lastname@example.org.
A few quick sector-specific updates on how those in power affect those in property
- Councils need clout: Industry professionals are speaking up about the proposed Decent Homes Standard plans. They fear the legislation will be pointless unless councils are funded to enforce the standards.
- Prevention, not prosecution: Propertymark is urging the government to focus on helping landlords keep their rentals in good order. They also want to see tenants – not landlords – held to account for issues like mould, in cases where the issue is down to the tenant’s neglect.
- Markets mellowing: After the catastrophic mini-budget from Liz Truss and Kwasi Kwarteng, the markets seem to have responded favourably to Jeremy Hunt’s appointment as Chancellor, and to Rishi Sunak stepping into the top job shortly after.
- New housing minister: Of course, with leadership shifts come cabinet shuffles, including a new Housing Minister. Lucy Frazer – who herself is a landlord – is the fifth person to take on the role in 2022.
Calling All Redbridge Landlords: Selective Licensing Has Landed
Following hot on the heels of parts of Leicester, the London borough of Redbridge is the latest area to announce that they’re introducing landlord licensing.
The current selective licensing scheme covers 12 wards: Aldborough, Chadwell, Church End, Cranbrook, Fairlop, Goodmayes, Loxford, Mayfield, Newbury, Roding, Seven Kings, and Snaresbrook.
It will run until at least 30th September 2023, after which it may be expanded to include new areas and to beef up inspections and enforcement.
With new schemes popping up around the UK this latest announcement is a reminder to keep an eye on any developments in your area – or anywhere you own property – to make sure you’re complying with any local schemes.
Some Sobering Courts Stats
The Ministry of Justice published its mortgage and landlord possessions statistics for July to September 2022, and we’re bringing you the main points.
First, some excellent news: the courts continue to recover from the disruption of the pandemic. This will come as a relief to the thousands of landlords waiting to get a possession order and regain control over their property.
The less good news is that private landlord and Accelerated Procedure volumes have surpassed pre-pandemic Covid levels with private landlord claims recording the highest level ever. Possession actions have all increased significantly too. Here are a few statistics to give a flavour of what’s going on.
- Compared to July to September 2021, landlord possession claims increased 106%, from 10,202 to 21,012. Every part of the country has seen an increase, but the biggest increase was in London (with an increase of 118% in landlord claims and a 137% increase in landlord orders).
- 5,919 landlord claims were seen in London and 3,640 landlord orders were at London courts in July – September 2022, which made up 28% and 24% of respective totals.
We’ve also seen increases in mortgage repossessions, compared to the same time last year.
- There was a 30% increase in mortgage possession claims, from 2,832 to 3,680.
- There was a 91% increase in repossessions by county court bailiffs, from 390 to 744.
- The highest rate of mortgage possessions claims has been in the South East.
You can dig deep into the data by reading the full report.
Freeze! Have you checked your insurance lately?
As the nights get longer and the weather gets less friendly, insurers are bracing themselves for a flurry of claims. Yes, unsurprisingly, Buildings Insurance claims are much more common in the colder months.
‘Insurers get a lot of storm damage claims concerning roofs and the ingress of water that comes from that,’ says Matthew Crawley, one of Mashroom’s insurance specialists. ‘Some areas are set to experience more flooding, which of course puts properties at risk – particularly if they’ve previously suffered from flooding.’
And it’s not just rain or river water that pose a risk. ‘In really cold weather there are the risks that come with frozen pipes,’ Matthew says. ‘When those pipes start to thaw they become brittle, they can burst.’
Water damage is a huge part of insurance and a very common claim, Matthew confirms. ‘It’s not just about fixing the part that the water came through, or escaped from. It’s the floors, it’s the ceilings, it’s everything else that gets affected at the same time.’
‘It’s a massive expense, and if there’s no insurance in place it’s coming out of the landlord’s pockets,’ Matthew says. ‘Buildings insurance is massively important, especially because a lot of lenders state that it has to be in place for that mortgage to be valid. But also, it protects your asset, so if the worst happens – a big fire or flood – you know that the property is covered.’
And there’s good news in the Mashroom offices: Two more brokers have come on board. ‘That means more expertise on the types of risks that our clients are coming across,’ Matthew says, ‘and making sure the clients have the right cover in place. And it means turnaround times are quicker as we have two new people who can help get cover sorted.’
Last but definitely not least, Matthew shares his two key pieces of advice for landlords when considering their buildings insurance:
- Double check that you’re covered correctly.
- Make sure you’ve got the right tenant type on your policies.
Actually we’re going to be cheeky and add a third one: if you need some advice on buildings insurance, drop Matthew an email at Matthew.email@example.com or book a call – we’re more than happy to help.
The Mashroom Show will be back on Friday 2nd December with more invaluable tax guidance, including how to choose the best holding structures for your properties. It’s certainly one you won’t want to miss!Don’t forget to join the Mashroom Landlord Community on Facebook, and you can find us on all the other socials too.