Allowable expenses against rental income
by K Nicholls FCA
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What are the allowable costs against rental income?
It is one of the most common questions we get asked and it is understandable why. Many landlords innocently misunderstand the difference between a CAPITAL expense and a REVENUE expense. In particular, establishing the difference between a repair and an improvement and claiming only the mortgage interest not capital repayments on loans.
The common notion is that because you have spent money on your property, it automatically follows that you can set it off against your rental income.
Some expenditure never qualifies for any tax relief
Some expenditure is only allowable against the gain when you sell the property
Some expenditure may be deducted from rental income in calculating taxable income
Some expenditure may not be claimed as a deduction but is subject to special rules
Let s take things one at a time.
When you buy a property
The costs and expenses associated with the purchase are treated as part of the purchase price and cannot be set against rental income. We would advise you to prepare a simple statement of all the costs as follows:
Building survey charges
Independent inspection charges
Auctioneers costs (for those of you who have bought through auctions)
Your solicitors completion statement should contain the majority of the costs.
These can be deducted from the gain (or added to the loss) when you sell the property. You should keep a record of all the costs together with the supporting receipts so that you can claim Capital Gains Tax relief for the expenditure when you sell.
What happens if the deal falls through?
In short, any costs and expenses associated with a deal that falls through are never allowable.
So if you are thinking of buying a property and spend money instructing solicitors and arranging surveys and then decide not to proceed, or worse still the seller pulls out, there is no tax relief for the costs.
So what are the allowable costs against rental income?
The general rule is that the expenditure must be expended "wholly and exclusively" for the Rental Income business. Here is a list:
Interest and other finance charges
The interest accrued on any loan taken out to purchase the property is claimable. Arrangement fees paid to brokers in arranging a loan are also allowable. If it is a repayment mortgage, then it is only the interest element which can be claimed, not the total repayments. If you have a separate bank account for the property business then any bank charges can be claimed. You should obtain an annual loan statement from any lender as part of your proof of the interest paid.
Repairs and maintenance
Repair work carried out on the property can be claimed provided that it is not a capital improvement. If you lived in the property prior to letting it, then work carried out before the property is let is seen as maintenance of the property as a result of private use rather than for rental purposes, so cannot be claimed.
Repairs to furnishings cannot be claimed if there is a furnished residential letting and you are claiming the Wear and Tear Allowance.
Do not forget to include the gas safety certificate cost if applicable.
Legal, management and accountancy fees
You cannot claim any legal fees in connection with the purchase of the property or any fees for the initial lease if it is for more than one year. Any legal fees in connection with the renewal of a lease, a shorthold tenancy of less than 1 year, eviction of clients, rent collection or management fees and accountancy are all claimable. Letting Agents fees, managing agents fees and accountants fees are all allowable.
It is important that you insure the property and the premium for the buildings and/or contents can be claimed. Life assurance premiums are not claimable.
Rent, rates and council tax
You may pay ground rent if the property is a flat. The tenant normally pays the rates or council tax, but if you do pay these costs or there are any void periods where you pay these costs then these can be claimed.
If you pay any service charges or for any other services in connection with the letting e.g. electricity in common areas, these should be claimed. If the property is a furnished holiday letting then it is likely that you will pay for electricity, gas, water, television licence, telephone and other services.
If you need someone to carry out a regular service for you e.g. cleaning, we recommend that you pay a fixed rate for that service and do not provide any tools or materials so that they can be treated as self-employed. However, if for example, you employ a cleaner for one hour a week and provide all the materials, then that person is probably an employee. Be aware, that if you do employ an employee, you need to ensure that you comply with Employment Regulations including Working Time Directive National Minimum Wage, Health and Safety and PAYE/NIC. The national minimum wage from 1st October 2010 is £5.93 per hour for adults over age 21. We advise that you should ask your employee to complete Part 1 of form P46 (www.hmrc.gov.uk/forms/p46.pdf <http://www.hmrc.gov.uk/forms/p46.pdf>). Provided that you do not pay more than £97 per week and your employee marks either certificate A or B, you can retain the form P46 and take no further action. If certificate C or no box is marked on P46 or you pay more than £97 per week it will be necessary to have a PAYE scheme in place.
Do you travel to the property to carry out maintenance or deal with issues with the tenants? If so you should claim the cost of travelling. In the case of your own vehicle, you can either simply claim a mileage rate which is normally 40p per mile or you can claim the actual expenditure incurred but you will then have to keep all your motoring receipts. It does have to be reasonable - if you live in London and spend a week on holiday in Cornwall, popping in for ten minutes to check that the holiday home next door was OK would not make the journey a business trip!
These can include postage, stationery, telephone calls and other administration expenses. If the property is managed by you, you could also claim for using your house as an office. Use of home as office is a grey area with no real hard and fast rules. You should contact us for clarification and the circumstances are invariably different from case to case.
The licence fee for Houses of Multiple Occupation (HMO) is claimable for example. Any other expenses incurred out wholly and exclusively for the property business can be claimed.
The cost of purchasing or improving a property (e.g. an extension) cannot be claimed as revenue expenditure against your property income. The distinction between capital and revenue expenditure is not black and white. If you buy a property and simply redecorate it before you let it out, this will be considered to be revenue expenditure. If however you bought a property for a significantly lower price than normal because it was in a poor condition and then carried out substantial works, this expenditure would probably be considered as capital expenditure.
However, most capital expenditure is eligible for relief for Capital Gains Tax purposes when you come to sell the property, so it is important that you keep records and receipts for the expenditure incurred.
Capital Allowances (Not available on Residential Lettings)
Whilst structural works cannot normally be claimed, capital allowances are available on the purchase of fixtures, plant and machinery. There is an Annual Investment Allowance for expenditure up to the limit. The limits are as follows: 2008/09 and 2009/10 £50,000, 2010/11 and 2011/12 £100,000 and 2012/13 £25,000 (the later years are subject to changes by future Budgets). As most landlords will not be spending more than the annual limit or claiming for a car (because they will claim a mileage rate), cars and eligible expenditure over the annual limit are not discussed.
Examples of expenditure eligible for Annual Investment Allowance are as follows:
Cookers Washbasins Furniture Storage equipment
Washing machines Sinks Carpets Counters
Dishwashers Baths Curtains Machinery
Refrigerators Showers Boilers Lifts
Electrical systems Water systems Heating systems Alarm systems
The list is not exhaustive and you should obtain further advice from us, particularly if your expenditure is over the annual limit.
If you sell an asset on which you have previously claimed Capital Allowances, the proceeds are taken into account and may create an additional income charge.
Wear and Tear Allowance for Furnished Residential Lettings
A 10% Wear and Tear Allowance is calculated on the rents receivable less any charges that the landlord incurs which would normally be the obligation of the tenant e.g. Council Tax or water charges. No actual expenditure on furnishings or fittings is eligible for relief but all other revenue expenditure which is incurred wholly and exclusively in connection with the property can be claimed.
If Capital Allowances or the Wear and Tear allowances are not available on residential premises, then you can claim expenditure on a renewals basis which means that you can claim for the cost of replacing furniture, fittings and machinery but you cannot claim the original cost of that item when it is first purchased.
If you use the property for private purposes, which is most likely if it is a furnished holiday letting or you are not claiming Rent a Room relief in your own home, then any expenditure claimed must be restricted for its private use.
If you have previously occupied a property then any expenditure which relates to that period of occupation cannot be claimed. So any maintenance of the property prior to the first letting is private. Conversely, if for instance you had paid an annual insurance premium on 1st April and left the property with a view to letting it on the following 1st October, then you would claim one half of the insurance premium paid even though it was paid when you occupied the property.
This can be a confusing area for many landlords so if you need some help or advise then get in touch. We offer a free help and advice line which is available from 9.00 and to 5.00pm Monday to Friday or alternatively simply email us your question and we will answer it either the same day or by the next working day.
© Thandi Nicholls Ltd 2011 All Rights Reserved - The above article is provided for guidance only and may not cover your personal circumstances so you should not rely on it. It is important that you seek appropriate professional advice which takes into account your personal circumstances where you can provide the full facts of the case and all documents related to your case. Thandi Nicholls Ltd t/a uklandlordtax.co.uk nor K Nicholls FCA or S Thandi can be held responsible for the consequences of any action or the consequences of deciding not to act.