Buy-to-let Landlords - Most Common Tax Mistakes (and how to avoid them)

*Please note the information in this article may be out of date

With campaign letters and enquiries on the rise, what is it that HMRC are looking for? Here’s an overview of the main categories of mistakes.

Do you worry about the dreaded brown envelope? 
Do you panic when hearing about the latest HMRC campaign?
Do you fear you have made a mistake completing your tax return?
With campaign letters and enquiries on the rise, what is it that HMRC are looking for? Here’s an overview of the main categories of mistakes.

“Ghost” landlords

This is a term to describe landlords who are not declaring their rental profits. To be clear, no matter what anyone tells you, this is tax evasion and to be avoided at all costs. HMRC have access to a lot of information to help them identify such landlords – from the Land Registry, who hold details of all property transactions, to letting agents, who can be forced by HMRC to divulge their client list via other avenues like landlord registers and housing benefit claims.

Incorrect deduction of mortgage repayments

Make sure you review your mortgage statements carefully.  HMRC state that this is perhaps the most common error that landlords make. While many buy-to-let mortgages are interest only, some are not, as is often the case if your mortgage is on a property that was previously your main residence. If your mortgage payments include any element of repayment of the capital borrowed then that part of the mortgage payment cannot ever be deducted from rental income profits.  Of course, remember there are big changes with regards the restriction of finance costs, and we recommend you view our blog on this subject.

Is it a repair, or is it an improvement?

This is a big and complex area, and one that has always caused confusion for many landlords.  While you can usually deduct repairs as a cost against rental income, you cannot usually claim the cost of any improvements to the property.  But then again, there can be some costs such as replacing single glazed windows with double glazed windows which HMRC will usually allow as a repair due to what they call “technological advances.”  It is a bit of a minefield.  Of course, in many instances, the distinction will be obvious however, tax advice from property tax advisors should be sought prior to undertaking any work on a buy-to-let property that could be deemed to be an improvement.

Initial cost of furniture and fittings

Simple enough to understand but still a common error. The initial cost of furnishing a buy-to-let property is not deductible against rental income. You may however be able to claim the cost of replacement furnishings.

Interest on remortgages

When buy-to-let landlords wish to make a new purchase or to improve existing properties, a common strategy is a remortgage. However, the interest payable on the remortgage is not automatically allowable. Where the total amount of the mortgage is more than the market value of the property on the day it was first let, or where the amount raised by the remortgage is not used for the letting business, then the interest payable on the remortgage would not be allowable as a deduction against rental profit.  Again, care must be taken with regards the new Section 24 rules on the restriction of interest and finance costs.

Reducing your risks

This feature includes just a few examples of the most common errors made by buy-to-let landlords on their Self-Assessment tax returns and the areas that a tax inspector is most likely to scrutinise. Unless you have the time to keep up to date with the regular changes in property tax law, you should always seek professional advice on what is, and what is not allowable as an expense against taxable profit.

Going back to the first category, if you are a “ghost” landlord, then it is absolutely in your own best interest to declare your rental income to HMRC, and this can be done via the Let Property Campaign .  The amount of penalty you will be charged on the unpaid tax is significantly reduced compared to if you wait for the inevitable brown envelope from HMRC to catch up with you.  As we always say, come forward to HMRC before they come to you!