This article is intended to give a quite comprehensive checklist of expenses incurred by a landlord that can be claimed for Income Tax purposes in a normal property rental business. The list doesn’t cover every conceivable expense but hopefully should give the reader a useful guide – with some tips and warnings about common pitfalls along the way.
Before the list itself, let’s look at the fundamentals – why some expenses can be claimed, and others cannot.
The first question to ask is, “Was the expense incurred for the purpose of the property letting business?” This is a deceptively simple question, and there are many tax cases which have covered this point in minute detail but the basic principle holds good. Often, the answer will be straight forward. For instance, paying an agent to look after a property is directly related to the letting business but buying new clothes is not. On the other hand, if you’re maintaining the property yourself then the cost of protective work wear such as overalls, gloves and safety boots, etc. should be allowable. There can also be more than one ‘purpose’ to the expenditure, in which case a realistic apportionment in respect of the business element may be allowed.
But it also pays to be careful and to ask a second question, basically “For how long does the benefit of that expense last?” This is the Capital v Revenue Divide we looked at in Winter 2010/11. Adding a bedroom is a capital improvement to a property whose benefit will last for many years, if not indefinitely. In contrast, decorating a property will help to maintain it but it will need to be re-decorated eventually – and that’s the kind of expense you can claim for Income Tax purposes.
One common pitfall is to justify an expense as being necessary in order to let a property, such as “We had to install a fire exit in the upper floors or we couldn’t rent the house out”. It makes perfect sense economically but from a tax perspective it may simply confirm that the expense has resulted in a tangible improvement to the property, and is capital instead of a deductible ‘revenue’ expense.
The List of Allowable Expenses
Accountancy Fees – strictly, it is the cost of preparing the rental accounts that is deductible and the costs of filling in a tax return or calculating the tax liability are not but HMRC has long allowed normal recurring accountancy fees – although care should be taken as regards ‘one-off’ fees, such as for dealing with enquiries.
Advertising for tenants.
Agents’ Fees for property management, including finding and vetting tenants, and inventories.
Bad and Doubtful Debts – where rent is strictly due from a tenant it is taxable but if there’s a genuine expectation it 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.
Cost of Collecting Rents / Enforcing Debts.
Cost of Services Provided – such as where the landlord pays for gas, electricity, water rates, concierge or annual service charges on a flat.
Capital Allowances on plant and machinery used in the business (but not items physically situated in any let residential property unless it’s a “Furnished Holiday Let”, as defined). This is an Income Tax deduction for capital expenditure on certain categories of qualifying assets.
Cleaning and waste disposal.
Council Tax, Rates.
Rent and Ground Rent.
Insurance – Buildings, Contents and Loss of Rents, including claim and/or valuation fees.
Landlords’ Energy Savings Allowance – strictly capital expenditure because of the ‘enduring benefit’ 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. Note that it’s ‘per dwelling’ so, for instance, each flat in a single building will get its own Allowance. Available for expenditure up to April 2015 but not for “Rent a Room” or “Furnished Holiday” lets. Capital Allowances are also available for adding thermal insulation to existing commercial buildings – here the standard rate is 10% per annum although the Annual Investment Allowance, may potentially be utilised to gain an immediate 100% deduction. There is no ‘per building’ cap for commercial buildings.
Lease Premia – when a tenant sub-lets a property, an element of any premium originally paid may be deducted against the income from the sub-let. The calculations can be complex – for more information, please see James Bailey’s article in Issue 17. You
can get tax relief for a lease premium even if you didn’t pay it, if you are an eligible “Successor in Title”.
Legal and Professional Costs – 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 so as to re-let.
Loan or Mortgage Interest and charges for buying, extending or improving a property – but not the capital repayment, if any. The loan doesn’t have to be secured against the let property itself. Special rules apply to companies and their ‘Loan Relationships’.
Maintenance, Repairs and Decoration are all allowable deductions. Repairs to items in the property, as well as the fabric of the property itself, are allowable. Take care to avoid the pitfall of claiming for capital improvements – such as replacing standard quality fittings with items of a tangibly higher quality. Where the “Wear and Tear Allowance” is available, (see below), the cost of buying or replacing furniture or white goods is not deductible.
Motor and Travelling costs 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 and other office consumables to the extent that they relate to the property letting business. If there is a substantive non-business purpose to a journey, the cost may not be allowable.
Provisions, such as for dilapidations on a head lease when sub-letting, may be deductible but advice is recommended to ensure the claim is valid.
Renewals Basis – the cost of replacing (or repairing) fixtures integral to the building (such as sinks, baths or boilers) can be claimed, whether or not a Wear and Tear Allowance has (or may) be claimed. The initial cost (or any improvement element on a replacement item) is not deductible.
Subscriptions to Landlords’ Associations and similar.
Use of Home as an Office – landlords often overlook the expenditure they incur in running their property business from home. For some landlords, the expenses may be little more than a proportion of their telephone bills. But other landlords may incur 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 there is a friend or relative who can genuinely be employed in the rental business, then this can be a tax-efficient method of extracting rental profits. Note that people who are already joint owners in the property may not benefit from wages.
Wear and Tear Allowance – basically a special deduction available only in respect of fully furnished residential properties, where Capital Allowances are prohibited. Equivalent to 10% of the gross rents after any costs which would ordinarily be the tenant’s burden, such as rates.
Properties let out at less than normal market rent / “Uncommercial Lettings” – not to be confused with situations such as providing a discount as an incentive to a prospective tenant, this means where there is a non-commercial purpose to the letting, such as its being 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 the 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 forwards against future profits.
Use of Home as an Office – whilst some landlords overlook these expenses, others may be claiming amounts which HMRC will see 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 justifiable.
Private / non-Business Use – Always consider whether or not there is an element of expense that should be disallowed as being for non-business purposes. The non-business proportion may of course change over time or from one year to the next.
Remember it’s a good idea (and in some cases a legal requirement!) to keep the relevant paperwork for future reference if necessary.