In this article, we look at a checklist of expenses incurred by a landlord in a normal property rental business that can be claimed for tax purposes. While the list is non-exhaustive, nevertheless, it should serve as a useful guide to provide some insights and tips on how to avoid some common traps.
Before presenting the list, it is important to look at some basic questions.
Was the expense incurred for the business purpose?
This is a strangely simple question and quite a lot of tax cases have dealt with this question in detail. Mostly, the answer will not be that straightforward; however, the fundamental principle remains the same.
For example, any expense that is directly related to the letting business will be claimable e.g. paying an agent to look after a property. On the other hand, any expense that is not directly related to the letting business will be non-claimable e.g. buying new shoes.
Similarly, the cost of protective work wear such as overalls, gloves and safety boots are claimable expenses if you are the one maintaining the property yourself.
It may be pertinent to mention that at times there may be more than one purpose to the expenditure – in which case a pragmatic apportionment in respect of the business element in question may be permitted.
What is the nature of the expense – Capital or Revenue?
Distinction needs to be drawn between capital and revenue expenditure.
For instance, decorating a property will be treated as a revenue expenditure (and hence claimable) as it will help to maintain the property in the short-term and the property will need to be re-decorated eventually.
In contrast, adding a new room will be treated as a capital expenditure as it is an improvement to a property whose benefit will last for many years.
It may be important to note that justifying an expense as being necessary to let a property is a common mistake people make sometimes. For example, statements such as, “We had to install a fire exit in the upper floors, or we could not rent out the house” may make sense economically.
However, from a taxation perspective, it may simply confirm that the expense has resulted in a tangible improvement to the property and as a result is a capital expenditure rather than a deductible revenue expenditure.
As we have discussed some basic questions and the treatment of various kinds of expenditures, we now look at the list of allowable expenses.
- Advertising for tenants
- Cost of Collecting Rents/Enforcing Debts
- Cleaning and waste disposal
- Council Tax Rates
- Rent and Ground Rent
- Subscriptions to Landlords’ Association and anything similar
Accountancy Fees: This is the cost of preparing the rental accounts which is deductible and the costs of filing a tax return or calculating the tax liability which is not. However, HMRC has for long allowed normal recurring accountancy fees – although care must be taken for ‘one-off’ fees, such as for dealing with enquiries.
Bad and Doubtful Debts: If there is a genuine expectation that the rent will never be paid, or where steps have been taken to recover the debt but without success, then the income lost is allowable as a deduction. However, where rent is strictly due from a tenant, it is taxable.
Cost of Services Provided: This is the cost landlord pays for gas, electricity, water rates, concierge, or annual service charges on a flat.
Capital Allowances on Plant and Machinery: These are used in the business (but not items physically situated in an let residential property unless it is a “Furnished Holiday Let” as defined). This is an income tax deduction for capital expenditure on certain categories of qualifying assets.
Insurance: This includes buildings, contents, loss of rents including claim and/or valuation fees.
Landlord Energy Savings Allowance: While it is a strictly classified as a capital expenditure because of the ‘enduring effect’ but special tax rules allow 100% immediate relief on up to £1,500 on each dwelling house – for the insulation of lofts, floors, cavity or solid walls, draught proofing or hot water insulation.
Please note that it is ‘per dwelling’. Therefore, each flat in a single building will get its own allowance. This is available for expenditure up to April 2015 but not for “furnished holiday” or “rent a room” letting. Capital Allowances are also available for adding thermal insulation to existing commercial buildings – where the standard rate is 10% per annum – although the annual Investment Allowance may potentially be utilized to gain an immediate 100% deduction. There is no “per building” cap for commercial buildings.
Lease Premia: This is when a tenant sub-lets a property and an element of any premium originally pad may be deducted against the income from the sub-let. This calculation can be complex. However, you can get a tax relief for a lease premium even if you did not pay it – if you are an eligible “Successor in Title”.
Legal and Professional Fees: While the initial cost of a new lease (for more than a year) is capital and not deductible. The cost of renewing a lease of less than 50 years duration is deductible, except to the extent that it relates to a premium. Where a replacement lease closely follows a previous agreement, and on similar terms, it may be allowed. Other allowable costs include rent arbitration and evicting an unsatisfactory tenant to re-let.
Maintenance, Repairs and Decoration: These are all allowable deductions. In fact, repairs to items in the property as well as the fabric of the fabric itself are allowable. Care must be taken, however, to avoid the pitfall of claiming for capital requirements – such as replacing standard quality fittings with items of a tangible higher quality.
Motor and Travelling Costs: These are in relation to running the property business such as travelling from one’s home office to the let properties, to meet agents or to buy consumables for the business.
Printing, Postage Stationery: These costs along other office consumables to the extent that the relate to the property letting business. However, if there is a substantive non-business purpose to a journey the cost my not be allowable. Also, provisions such as dilapidations on a head lease when sub-letting may be deductible but expert advice is recommended to ensure that the claim is valid.
Renewal Basis: The cost of replacing (or repairing) fixtures integral to the building such as sinks, baths or boilers) can be claimed – whether a Wear and Tear Allowance has (or may) be claimed. The initial cost (or any improvement element on a replacement item) is not deductible.
Replacement Relief: The replacement must be on a like for like basis and where no equivalent is available the replacement must be as close to equivalent as possible. You can also claim the costs of disposing the old item as well as transporting and installing the new item. Also, if you receive cash for the disposal of the old item, you must deduct this from the replacement cost before claiming the relief.
Use of Home as an Office: Landlords often overlook the expenditure they incur in running their property business from home, For some landlords, the expense may be little more than a proportion of their telephone bills while for others, this may be a substantial expenditure – particularly if they have designated a room as their office.
Wages paid at (no more than) a commercial rate: Although, this can potentially be expensive in terms of administration and employers’ liabilities, if a friend or any relative can genuinely be employed in the rental business then this can be a tax-efficient method of extracting rental profits. Care must be taken to ensure that people who are not already the joint owners in the property may not benefit from the wages.
Deductible Expenses – Points to Consider
It is important to note that properties let out at less than normal market rent “Uncommercial Lettings” must not be confused with situations such as providing a discount as an incentive to a prospective tenant. This means that where there is a non-commercial purpose to the letting – such as letting the property to a friend or relative.
In such cases, the expenditure has not been incurred “wholly and exclusively” for the purpose of a rental business – so in theory no expenditure is deductible at all. In practice, however, HMRC will allow the expenditure up to the level of income received (if any). So, whilst the income may be covered, an ‘uncommercial let’ can never create a loss that can be pooled with ‘normal’ lettings or be carried forward against future profits.
As far as Use of Home as an Office is concerned, while some landlords overlook these expenses others may be claiming amounts which the HMRC sees as unrealistic and open to challenge. Any claim – and particularly the apportionment of any ‘mixed’ expenses (i.e. which include a non-business element) should be justified.
Similarly, for Private/Non-Business Use, always consider whether there is an element of expense that should be disallowed for non-business purposes. This non-business proportion may change over time or from one year to the next.
Final Advice for Deductible Expenses
We hope that the list helps property investors claim all the deductions they are entitled to.
Interestingly, expenses can be claimed on a property even if it is not actually occupied – provided it is being held out for letting on a commercial basis. However, special rules apply prior to the business commencement.
It is always a good idea and, in some cases, a legal requirement to keep all the required documentation ready for future reference if necessary.
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