Buy-To-Let Tax Tips

Tax Amnesty Has Expired

Last month, the HM Revenue & Customs (HMRC) tax amnesty expired. This allowed buy to let investors to declare any mistakes or errors in the amount of tax they had paid in return for more lenient penalties.

In order to avoid mistakes, it is important to know the rules. Here are some tips for buy-to-let landlords to help them stay on the right side of HMRC:

You can get tax relief on any mortgage interest that you pay (but not on repayment of the capital itself). For example, if an investor has a rental income of £850 a month and their interest repayments are £500, they would be liable for tax on just £350.

As a result, it is advisable to opt for an interest-only rather than a repayment loan. This allows you to keep your mortgage payments to a minimum while maximising the tax relief you get from being able to offset your rental income.

Landlords can also offset items such as letting agents' and accountancy fees, buildings and contents insurance premiums, and the cost of services they provide to their tenants, such as cleaning or gardening.

However, landlords cannot offset the costs of structural improvements to the property – but they can deduct the cost of replacement furniture, white goods (such as refrigerators) and furnishings.

This can be achieved by either keeping records, or claiming 10 per cent of the annual rental income as wear and tear. The latter option tends to work out to be better value and is also simpler than documenting individual replacements.

But be warned – you need to keep details of all income and expenditure for up to six years in case HMRC queries anything on your tax return.

If you think that you owe HMRC money, contact your local tax office (or get your accountant to do it) as soon as possible. Investigators from HMRC will look on you much more favourably than if they have to come after you. In order to find your nearest HMRC inquiry centre, ask your accountant or log on to HMRC's website at www.hmrc.gov.uk.

Remember that in addition to the tax arrears, and interest for its late payment, you could face penalties of up to 100 per cent of the undeclared tax liability depending on the severity of the case. If you can prove that you have made a genuine error you may be able to escape a fine, but if HMRC judges that you have deliberately avoided tax the penalties are likely to be severe.

If you think you have paid too much tax, you should contact your local tax office. You will either be asked to write a letter explaining what you think is wrong, or complete a revised tax return. If HMRC agrees with you, you will get a refund plus interest, and you can claim back any tax you have overpaid in the past six years.

When you sell your property, you may have capital gains tax (CGT) liabilities. The first £9,200 of any capital gain is exempt from CGT (£18,400 for married or civilly contracted couples), but you have to pay CGT at 20% for basic rate tax payers on any profit above that amount.

If you have owned the property for more than three years you will also qualify for non-business asset taper relief. If you sell within three years of ownership you pay tax on 100 per cent of the gain, but this reduces by five per cent a year thereafter, down to 60 per cent after 10 years.

The situation is better if you are renting a home in which you have previously lived. You would not reliable for the tax for the years you lived there, and for the last three years of ownership. You can also claim lettings relief, worth as much as £40,000 per owner. If you sell a property after seven years' ownership, having lived in it for three of those years, CGT will only be payable on one year's profits. The lettings relief, plus taper relief and your CGT allowances, could wipe out your tax liability altogether.