If you're a landlord receiving rent from letting a residential or commercial property it is important that you consider the eligibility of any expenses which you incur in arriving at the profits, or in some cases, losses from your rental business. Being aware of the deductions which you can claim may help to reduce the tax you need to pay.
Because profits from UK land or property are treated, for tax purposes, as arising from a business they are subject to the same tax rules as for trades. Rental business expenses must be incurred wholly and exclusively for business purposes and not be of a capital nature.
One of the first tasks in examining the eligibility of expenditure is therefore to decide whether it constitutes 'capital' expenditure or 'revenue' expenditure.
If you are incurring expenditure which results in an improvement of the property, such as adding a conservatory or extension, that will be treated as capital expenditure and can't be deducted from rental income. Rather it will be claimed against any future Capital Gains Tax when the property is sold.
Contrast this with repairs such as decorating or mending broken windows which are revenue items and can be deducted from rental income.
If a property is acquired in a derelict or run down state and the price paid for the property was substantially reduced, expenditure incurred in repairing it and putting it into a fit state for letting or use in the business may be regarded by HMRC as capital rather than revenue expenditure.
Here are some typical types of expenses which are revenue in nature and can be deducted from the rental income to reduce the taxable profits. It is not an exhaustive list but hopefully serves as a reminder to landlords as to what they may claim:
- Council Tax
- Water Rates
- Ground rents
- Letting charges
- Management fees
- Service charges
- Legal costs
- Garden upkeep
- Staff wages
- Loan interest
- Finance charges
From April 2016 the widespread 'Wear and Tear Allowance' which allows landlords of furnished residential properties to deduct 10% of their rental income to cover the wear and tear of furniture and fittings etc has been abolished.
It has been replaced by a system allowing landlords to deduct only the actual costs incurred on replacing furnishings in the tax year.
Examples of this sort of expenditure include:
- Movable furniture or furnishings, such as beds or suites
- Fridges and freezers
- Carpets and floor coverings
- Crockery and cutlery
A Tax Times Newsletter later this year will look at the other significant changes to tax relief on finance costs which will have a dramatic effect on buy to let landlords from the 2017/18 tax year onwards.