We
all have to pay income tax over our annual tax allowance,
and any positive cashflow received from property is classed
as income. There are, however, many expenses you can apply
to offset this income and reduce your taxes. These are,
in general, running costs ("revenue costs") such as:
-
building
and contents insurance
-
service
contracts (e.g. for appliances, central heating, etc.)
-
safety
certificates (gas, electricity)
-
bank
charges
-
costs
incurred when finding tenants (advertising, tenant referencing,
letting company fees)
-
fees
paid to management companies
-
fees
for legal and accountancy advice
-
subscriptions
to and purchase of advisory documents, magazines, papers
and courses
-
ongoing
repairs and maintenance
-
cost
of any utilities you pay for on behalf of your tenants
-
service
charges and ground rent on leasehold properties
-
travel,
telephone and paperwork costs incurred in running the
property
-
interest
paid on loans to purchase the property
If
your property is let furnished, including holiday lets,
you may be able to apply depreciation, usually 10% deduction
for wear & tear, and benefit from even more deductions.
You
will not be able to offset any cost incurred that improve
the property, only those that maintain it to its original
standard. So if you replace like with like, this is a revenue
cost, but if you replace with a higher specification, this
becomes a capital cost and can only be offset against the
CGT.
Other
costs you cannot offset against income include any costs
you incur at any time that the property is not available
for letting and, the big one, you cannot offset any capital
paid toward the mortgage or loan on the property, i.e. sums
paid to reduce the amount you've borrowed.
It
is this last point that has serious property investors ticking
the "interest only" box when choosing the type of mortgage
they want on investment properties as only the interest
portion is tax deductible.
If
you have an interest only mortgage, you never pay any of
the capital, therefore the entire mortgage payment can be
offset against the revenue.
There
is one caveat to this last point, however, and it's an important
one. If the property is re-mortgaged to such an extent that
the mortgage exceeds the value of the property when letting
commenced and the money is not used for the purpose of the
lettings business then the interest charged cannot be offset
against the rental income.
©
Maria Davies, www.WomenInPropertyInvestment.com
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