Under the new tax rules about mortgage interest for residential landlords, rental income will be taxed as income (at marginal rate) and a service charge is tax deductible. The service charge for my properties includes an element for heating and hot water, which tenants receive for free (as it’s included within rental amount). Will the new system be unfairly taxing me on this grossing up, since this is really not an income? Could I net off a proportion of the income for the heating, thereby reducing the taxable income, or does it not make a difference?
Arthur Weller replies:
It does not make a difference. Let's say you charge your tenants per annum (pa) £10,000 total gross rental income. The service charge that you have to pay is £1,000 pa. Your tax charge is calculated on £9,000 net rental income. The new rules, that I think you are referring to, only affect the deductibility of interest from the £9,000 figure. But a service charge continues to be a completely allowable expense