Any profits you make from renting out a property are added to your other income and typically taxed at 20%, 40% or 50%, notes Nick Braun in Business Tax Saver. What can be done to lower those taxable profits before the end of the tax year?
You can upgrade your property or make a pension contribution. Repairs such as fixing a broken window are immediately tax-deductible. Tax relief for improvements (eg, loft conversions) is only provided when you sell and will only save you up to 28% capital gains tax.
Between the two is a “hybrid” repair that will attract full income-tax (IT) relief (eg, a new kitchen or double glazing). To be treated as a repair, replace old with new and don’t add something that was not already present.
Alternatively, make a pension contribution. Say you’ve made a rental profit of £10,000 and stand to pay higher-rate tax of £4,000. Make an £8,000 contribution. HMRC will add £2,000 and you’ll also get tax relief of £2,000 on submitting your tax return. That adds up to £4,000, which offsets the IT payable on the rental income.