Property investors are over-paying thousands of pounds on tax because of a lack of knowledge of the tax system...

As many investors prepare to file this year’s tax returns, Property for Life reveals what investors should look out for to avoid being caught out.

Property investors need to ensure they are organised. A separate bank account should be set up and investors should keep track of rental income and expenditure, holding on to all relevant receipts.

Hiring professionals such as accountants and solicitors, will help to make the process much easier and any professional or legal fees can be offset against the rental income. However, fees incurred during the actual buying process cannot be claimed until the property is sold.

If the property is owned by more than one person then careful consideration needs to be given to the form the ownership takes, whether it be joint ownership, partnership or through a syndicate, each method will have its own tax implications.

Offsetting costs

Income tax is payable on rental income after allowable deductions have been taken into account and the list is extensive when it comes to what is and isn’t deductable. Investors can offset costs including utility bills when properties are empty, management agents fees and interest paid on borrowing costs, including  mortgages and loans.

In addition, costs relating to repairs or maintenance can be offset. However, improvements made to a property, such as adding a conservatory are not tax deductible, but they can be offset against the capital gains tax liability when the property is sold.

A buy-to-let property can be treated like a business and as such certain costs associated with running the business are deductible. These include marketing costs, travel costs and office costs such as a proportion of the utility bills.

There is likely to be capital gains tax paid on any profit accrued on the property, which could be up to 40%. However, there are steps investors can take to reduce their bill.

Tax exemptions

For example, you can claim exemption on the tax for the period you have permanently resided in the property and the final 36 months of ownership, irrespective of whether you have lived there. Other tax breaks include taper relief, and personal capital gains allowance of up to £8,500.

It is vital to plan for the next generation and to protect your assets from inheritance tax (IHT). The current threshold is £300,000, which means you are likely to be liable for inheritance tax, especially if you have a portfolio of properties.

However, there are various methods for reducing IHT. It is worth consulting a professional to ensure you minimise your family’s bill. It is essential to make a will, to ensure your estate is passed on according to your wishes and if your property is overseas you should seek inheritance tax advice and write a local will, as your British will may not be accepted.

Getting tax right ‘crucial’

David Austin, managing director of Property for Life: “If you don’t know the rules then you can’t possibly ensure you follow them. Whether you are buying in Britain or overseas you need to be fully aware of all the tax implications.

“If you are buying overseas investors need to research the tax requirements for the country they are buying in as well as the tax implications in Britain. Don’t be fooled into thinking you won’t be found out, the authorities now have the power to discover exactly what your income is whether it’s overseas or in Britain.

Getting your tax right is crucial to being a successful investor. Above all else, I would recommend professional advice is sought from an accountant, who should ensure you are aware of any tax implications, whilst helping you to maximise any deductions or relief you are entitled to.”