5 mistakes landlords make on their Self Assessment Tax Return

Mistake 1: Claiming the full mortgage interest

Due to Section 24, full mortgage interest relief is no longer an allowable expense when calculating your buy-to-let property profits.

Before this rule, landlords were able to offset the full amount of their mortgage interest against their rental income for tax purposes, which reduced the tax they had to pay on that income. However, under Section 24, buy-to-let landlords can only claim a basic rate of tax relief on their mortgage interest, regardless of their income tax rate.

Since April 2021, income tax relief landlords receive for residential property finance costs (mortgages) has been restricted to the basic rate of tax. This means that the amount of income tax paid on rental income has increased, particularly for higher or additional rate taxpayers.

When completing your tax return, it’s important to make sure you include only 20% of the mortgage interest in box 44 on your tax return. Also, if you have any unused finance relief costs from previous years, ​​don't forget to roll this forward in box 45!

If you’re affected by Section 24, there are a number of strategies available to mitigate the impact:

• Consider incorporating your rental properties into a limited company structure. The long-term tax savings may outweigh the upfront costs of incorporation.

• Review your portfolio and consider selling weaker performing properties.

• Don’t overlook the long-term implications of Section 24. While the changes may seem significant in the short-term, landlords should consider how they will affect them over the long-term and plan accordingly. For instance, when purchasing new properties, consider using a limited company.

• Explore options to increase the rental income to balance out the increased tax bill.

Mistake 2: Claiming for capital expenses

You cannot claim any capital expenditure on your self assessment tax return, only revenue expenses. Capital expenses refer to the expenses incurred to acquire, improve or enhance a property while revenue costs refer to the ongoing expenses incurred to maintain and operate the property.

While it may be tempting to claim as many expenses as possible, HMRC only allows revenue costs, such as repairs, maintenance and other day to day running costs to be claimed on your tax return. However, capital expenses, like adding an extension or en-suite can be claimed when you sell the property.

Learn more about claiming property expenses in our expert guide

Mistake 3: Incorrectly claiming for petrol

Landlords can claim a mileage allowance when using their own vehicle for business purposes, such as visiting properties. However, it's important to note that you cannot claim the entire cost of filling up your tank through the business unless you can demonstrate to HMRC that you have used the fuel entirely for a work related journey.

We recommend that you keep a mileage log in order to claim for the business miles that you’ve driven. HMRC’s standard mileage rate is 45p per mile for the first 10,000 business miles in the tax year, and 25p per mile thereafter.

It's important to note that this allowance is designed to cover fuel, wear and tear, insurance and MOT. Any additional car running costs cannot be claimed above these rates.

Mistake 4: Not declaring all of your income

Your tax return is based on all of your earnings, not just the income from your rental property. Make sure to report any salary or other income, as well as any capital gains from the sale of assets, such as a property or shares. Remember, failing to declare all of your income can result in penalties and interest, so double check that you've included everything.

Mistake 5: Not keeping good records

Proper record keeping is crucial for a successful self-assessment tax return. Regularly keep track of all income and expenses related to your rental property, including rent collected, repairs and maintenance costs, insurance, and any other expenses. Without good records, it will be difficult to accurately report your income and expenses on your tax return, meaning you could end up paying more tax.

Make sure to keep receipts and other documentation and set aside time to regularly update your bookkeeping. It’s much better to spend fifteen minutes each month keeping up to date rather than a stressful weekend rushing at the end of January. Also, consider using property accounting software like Provestor to stay organised!

Summary

We hope these 5 tips help you to avoid making these mistakes on your tax return.

Remember, if you're ever unsure about anything, it's always a good idea to seek the advice of a tax professional to make sure you're paying the correct amount of tax and claiming all allowable reliefs.

By planning ahead and staying organised, you can ensure that your self assessment tax return is filed accurately and on time.