Maximising Reliefs on Investment (buy to let) Properties

The Probe - December 2006
This tip is about maximising the reliefs available if you let out property. There are certain expenses and tax allowances you can deduct from your rental income.

Most people know that interest on a loan to purchase an investment property is deductible against the taxable profits on that investment. So too is interest on a loan to purchase an investment property even if the loan is not used for the purpose of the business.

There is a caveat here as total borrowings on the property cannot be greater than the value of the property at the time it was first bought.

This could be a way effectively for property investors to obtain tax relief on their domestic mortgage. Capital is raised on buy-to-let properties and used to repay some, or all, of the domestic mortgage.

Clearly you need to ensure the tax savings outweigh any increase in interest rates for exchanging residential borrowing for buy-to-let borrowing. With extremely competitive interest rates available on buy-to-let mortgages and as a higher rate tax payer this may well be worth considering.

Wear and Tear
For fully furnished residential properties you’re allowed to claim 10% of the net rent as a wear and tear allowance. This allowance can be claimed regardless of whether or not this amount has actually been spent on furniture and furnishings.

So it may be worthwhile providing just enough basic furniture for the property to qualify as ‘furnished’, even if the original intention was to rent it out as unfurnished.

You have a choice whether to claim the 10% wear and tear allowance or the actual cost of renewal of furniture and furnishings. So it’s not possible to claim the allowance and the renewals as well.

Please note that once one of these methods has been chosen that needs to be the method you use for all your furnished investment properties. So one option if you want to use both methods is to consider transferring the property into a spouse’s name who would then be running a separate property rental business.

There are lots of other ways to maximise your profit so if in doubt speak to your professional adviser.