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FIVE ways to slash your property income tax bill - by Arthur Weller and Amer Siddiq.

In this months article we will outline FIVE simple methods, which can be used to reduce or even legitimately wipe out any property tax liability.

Before we reveal the five tips please take note of the following important deadlines for submitting your tax returns and any tax liability due.

Important dates for your property tax diary

30th September

If you want the Inland Revenue to calculate your property tax liability for you then you must declare your property transactions from April 6th 2007 to April 5th 2008 to the Inland Revenue no later than 30th September 2008.

The Inland Revenue will then notify you of any tax that is due and it must be paid by 31st January 2009.

5th October

If you have generated any rental income profits (chargeable gains) then you must inform the Inland Revenue of this within six months of the end of the previous tax year. This means that if you made rental income profits in the 2007-2008 tax year then you must notify the Inland Revenue of this no later than 5th October 2008.

31st January 2009

However if you employ an accountant, tax advisor or calculate your tax liability yourself, then the deadline is 31st January 2009. Not only must you submit your completed tax returns, but you must also make all tax payments by this date. Failure to do so will lead to a non-negotiable £100 fine.

1. Look to claim costs as ‘Revenue’ costs

If you can claim large costs as ‘revenue’ costs rather than ‘capital’ costs then you can reduce your annual property income tax bill in a big way.

Sometimes it is easy to determine whether a cost is of a capital nature or not. For example, if you have had a new conservatory built, or even a new bedroom added, then this is clearly a capital expense. This is because it has increased the value of the property.

However sometimes distinguishing between the two costs is not so clear.

Consider the replacement of windows. If you currently have rotten single glazed windows then you will be able to replace them with UPVC double glazed windows and offset the entire cost against the rental income. There will be no need to class this as a ‘capital cost’.

This is because it is generally accepted that the standard windows used in modern properties are UPVC and not wooden single glazed windows. So you are replacing the current standard window fitting with a like-for-like window.

Remember: If you can class a cost as a ‘revenue’ cost then it will improve your cash-flow as you will pay less property tax.

2. Claim tax relief on ALL revenue expenditures

Remember the golden rule: If you have incurred a revenue expense for the purpose of your property, then you can offset it against the rental income.

This means that you can continue to lower your tax bill - legitimately. Most investors are aware that they can offset mortgage interest, insurance costs, rates, cost of decorating/repairs, wages and costs of services.

However so many investors fail to claim the following costs, which when added together can provide a significant tax saving:

  • Costs incurred when travelling back-and-to the investment property
  • Advertisement costs
  • Telephone calls made (or text messages sent) in connection with the property
  • Cost of safety certificates
  • Cost of bank charges (i.e. overdraft)
  • Advisory fees e.g. legal and accountancy
  • Subscription to property investment related magazines, products and services

3. Make sure you register any rental losses

We cannot stress this point enough.

The generally low rental yields on buy-to-let investment properties purchased over the past few years has meant that an increasing number of people have been making an annual rental loss.

By registering these losses with the Inland Revenue you will be able to take these losses forward and offset them against future profits. Given that the past few months has seen a rise in rental yields, there is a strong likelihood that your investments will now be starting to return an annual profit.

Therefore, by having registered your previous years losses you will be reducing your tax liability going forward.

Although it is not a compulsory requirement to register your losses with the Inland Revenue, it will work to your advantage and most importantly will save you tax.

4. Switch property ownership with your spouse if they are lower rate taxpayers

If you have a spouse who is a lower rate (or even nil rate) taxpayer and you are a higher rate taxpayer, then consider moving the greater portion of the property ownership into their name.

This means that a greater part of the profit will be attributed to the lower (or nil rate) taxpayer thus meaning that any property tax liability could be significantly reduced.

This is a very powerful strategy if your spouse does not work, as any tax liability can be legitimately wiped out.

Please note: that in order to use this strategy you partner must be trustworthy as legally they will ‘own’ a greater share of the property.

5. Mix and match the 10% wear and tear allowance

If you are offering a fully furnished property then it may be tax beneficial to use the 10% wear and tear allowance.

This is because you can start to claim the relief as soon as you start to receive income from the property.

If you have purchased a property in the last twelve months and have fully furnished it then you MUST consider the costs incurred for furnishing the property.

If the cost was high, then it may be better to start using the 10% wear and tear allowance.

This is because:

  • You will be providing high-quality furnishings and will not expect to replace them for a good few years, i.e., 5-7 years.

    Therefore by claiming the 10% wear and tear allowance you will be able to start claiming the relief immediately. This means that upto 10% of your rental income will be deducted

    If you do not claim the allowance then you will be using the ‘renewals’ basis method, which will not be used until you replace the furnishings. So, for example if you spend £7,500 furnishing a brand new property before you let it then none of this cost can be offset against your income until it is replaced, which could be 5-7 years in the future.
  • If you decide to sell the property before you renew the furnishings, then by using the 'renewal basis,' you will not have managed to offset any renewals cost at all against your property.

    This means that you will have incurred unnecessary taxes!

    However, if you use the '10% wear and tear allowance,' then you can claim this from the date you purchased the property.

Also, if you have purchased a property that includes furniture and furnishings then again it will be beneficial to claim the allowance.

Slash your tax bills with Landlords Property Management Software

Our easy to use Property Management Software will automatically calculate your 10% wear and tear allowance for you. It will also allow you to compare and decide which method (10% wear and tear or ‘renewals’) will give you the greatest tax saving.

To learn more ways to slash your property tax bills consider ‘Pay Less Property Tax 2009’.

  • Over 100 tax saving case studies
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  • Free Income and expenditure tracking software

About Arthur Weller

Arthur Weller is a Chartered Tax Advisor (CTA) and an integral part of the Property Tax Portal team. He offers a special rate tax advice service on any aspect of UK taxation, including property taxation, for as little as £97 for a 30 minute telephone tax consultation.

Key Facts:

- Over 90% of queries are answered within 30 minutes and within 3 days!
- Over 500 consultations done by Arthur through this website!
- You pay for the advice after it has been given

Here is what one of our customers had to say:

“Arthur contacted me the next day.  He phoned promptly and offered me clear and concise advice which he referenced to the HMRC website, taking me through section by section and explaining the implications each step of the way. 

He also sent me an MP3 recording of the session so that I was able to absorb the information more fully.  I am extremely impressed by his professionalism. Money very well invested as his advice will save me thousands of pounds.  I wholeheartedly recommend his services.

Thank you very much.” V. Loughery

To learn more about Arthur's tax advice service click here.