Buy-to-let investments can provide a great source of income for investors, but they also come with tax implications. In 2023, buy-to-let investors in the UK will have several options to reduce their tax liability on rental income. Here are some strategies to consider:
Utilise the Personal Allowance: Every individual in the UK has a personal allowance, which is the amount they can earn tax-free each year. Buy-to-let investors can use this allowance to reduce their taxable rental income.
Claim Allowable Expenses: Buy-to-let investors can also claim allowable expenses against their rental income, reducing the amount of tax they need to pay. Allowable expenses include things like repairs, maintenance, and insurance costs. It’s important to keep accurate records of all expenses to ensure that you can claim them correctly.
Make Use of the Annual Investment Allowance: If you are purchasing or improving a property for your buy-to-let business, you may be able to claim the Annual Investment Allowance (AIA).
The AIA is a tax relief that allows you to claim 100% of the cost of qualifying capital expenditure in the year of purchase, up to a certain limit. In 2023, the AIA limit is set at £1 million.
Use Mortgage Interest Relief: In the past, buy-to-let investors could claim tax relief on mortgage interest payments.
However, this relief has been phased out since 2017 and is now restricted to the basic rate of income tax. In 2023, the restriction will be fully implemented. To reduce the impact of this change, consider switching to a lower interest rate mortgage or restructuring your portfolio to reduce the amount of mortgage interest you pay.
Consider Incorporation: Another option for buy-to-let investors is to incorporate their business.
This means setting up a limited company to manage your properties. Incorporation can provide several tax benefits, including lower tax rates on rental income and the ability to claim mortgage interest relief in full. However, it’s important to consider the costs and administrative burdens of running a limited company before making this decision.
Buy-to-let investors in the UK can use several strategies to reduce their tax liability on rental income in 2023. By utilising personal allowances, claiming allowable expenses, making use of the annual investment allowance, using mortgage interest relief, and considering incorporation, investors can potentially increase their profits and reduce their tax bill. It’s important to seek professional advice before making any tax planning decisions to ensure that you comply with all regulations and maximise your tax savings.