Landlords absorb interest rate losses
Rising mortgage interest rates have left some buy-to-let investors facing a loss on their lettings. Owners of let property are taxable on their rental income, but can deduct from this expenses connected with the letting. For most landlords, the biggest expense is the interest on the money borrowed to buy the property. Therefore, rises in interest rates, which generally cannot immediately be passed on to the tenant in increased rent, have a large effect on a landlord’s net income.
Unfortunately, you cannot normally set a loss on property letting against other types of income. You can generally only carry forward such a loss and set it against future letting profits. You need to tell HM Revenue & Customs about the loss within five years and ten months of the tax year in which it occurred, normally by claiming it in your tax return.
There is, however, one special type of loss that you are allowed to set against other income of the tax year in which the loss occurred. Certain residential property in the UK on very short lets may qualify as a furnished holiday letting. The main conditions are that the property must be let commercially for periods not exceeding 31 days for at least 70 days a year and be available for letting for at least 140 days in that year.
Other expenses that owners can deduct from rent include the costs of repairing and maintaining the property, insurance, rent collection and providing services. There is also a landlord’s energy-saving allowance of up to £1,500 per residential property for expenditure on certain types of insulation. A renewals allowance (which is basically 10% of the rental income) can be claimed if the property is furnished. For furnished holiday lettings, you can claim capital allowances on the cost of furniture and fittings.
One cost that you cannot deduct is the capital repayment element of a mortgage. Most buy-to-let mortgages are interest-only, so the whole monthly payment is tax deductible. However, some people, such as those who let a property in which they previously lived, may pay a mixture of interest and capital repayment. If you have this type of mortgage, you need to check the annual statement from your lender to determine how much of your payment can be deducted.
The taxation of property is a complex area and there are many aspects, including some tax reliefs, that are not mentioned here.