What rental businesses can and can’t claim

11th December 2019

If you are a landlord you may have questions about what rental businesses can claim as allowable costs that can be offset against your rental income. As with many tax matters, there are grey areas and potential stumbling blocks. We’ve put together a guide to clarify some of the key terms and help you understand what you can and can’t claim.

What rental businesses can and can't claim

 

Revenue or capital?

It’s important to understand the difference between revenue and capital expenses when working out what rental businesses can and can’t claim tax relief on.

Generally speaking, and subject to certain other rules, expenses that are REVENUE in nature can be offset against rental income, whereas expenses that are CAPITAL in nature will be offset against the proceeds of a future disposal.

If you buy a property and simply redecorate it before you let it out, this will be considered to be revenue expenditure. However, if you bought a property for a significantly lower price than normal because it was in a poor condition and then carried out substantial works, then this expenditure would probably be considered capital expenditure.

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.

Remember, not everything is an expense!

Common thinking among landlords is that, because you have spent money on your property, it automatically follows that you can offset it against your rental income.

However, beware of this thinking as:

  • 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

What can rental businesses claim?

To be tax deductible against your rental income the expense must be revenue in nature and incurred wholly and exclusively for the purpose of renting the property. Below are some examples of expenses that may be tax deductible:

Repairs and maintenance

Repair work carried out on the property can be claimed, so long as it is not a capital improvement.

Also, it’s worth knowing that, 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 and cannot be claimed.

Legal, management and accountancy fees

You are not allowed to claim any legal fees in connection with the purchase of the property or its initial lease if it’s for more than one year. However, any legal fees in connection with the renewal of a lease, a short-hold tenancy of less than one year, eviction of clients and rent collection can be claimed, as can management fees and accountancy fees.

Services

If you pay service charges or charges for any other services in connection with the letting (e.g. electricity in common areas) then these can be claimed. And, 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.

Wages

Wages are an allowable expense; however, if you are employing someone then you will need to ensure that you meet all current employment legislation such as Working Time Directive, National Minimum Wage, Health and Safety and PAYE/NIC. The National Minimum Wage for 2019/20 for employees over 25 is £8.21.

Interest and other finance charges

If you were a private landlord before April 2017 with a mortgage on your property, any interest you paid towards the mortgage payments could be deducted from your rental income before you paid tax on it. However, HMRC has been gradually introducing new rules on buy-t0-let properties phasing out this relief and replacing it with a new 20% tax credit.

During the transition period, the percentage of your mortgage interest payments that landlords can deduct from their rental income has decreased by 25% each year, while the portion of interest payments that qualify for the new tax credit has increased by 25% each year.

Until April 2020, you can still deduct 25% of mortgage interest payments from your rental income, while 75% of payments qualify for the new 20% tax credit.

From April 2020, finance costs will no longer be an allowable expense and 100% of your mortgage will attract the new tax credit.

Basic rate (20%) taxpayers should see no change to their liabilities and commercial properties and furnished holiday lettings will not be affected by the changes.

Insurance

Insurance premiums for the buildings and/or contents can be claimed.

Rent, rates and council tax

You may pay ground rent on your leasehold property. The tenant usually 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.

Administration expenses

Examples of administration expenses that can be claimed include postage, stationery and telephone calls. Depending on how many properties you manage, you may also be able to claim the use of your home as an office. However, the rules for this changed in 2013 and either a complex calculation has to be made justifying the charge or the following can be claimed depending on the hours worked in an office:

Number of hours
worked per month         Monthly claim

25 or more                             £10

51 or more                             £18

101 or more                           £26

However, it is unlikely that a charge for using your home as an office can be justified unless you are managing a number of properties yourself.

Other expenses

Any other expenses incurred wholly and exclusively for the purpose of renting the property can be claimed. The licence fee for Houses of Multiple Occupation (HMO) is claimable for example.

Replacement Furniture Relief

As of 6th April 2016, in the instance where a residential property is not a Furnished Holiday Let or no Rent a Room relief is claimed, then the expenditure on replacing items of furniture and white goods will be allowed as a revenue expense less any proceeds on the disposal of the item being replaced, provided that it is a like for like replacement.

The previous Wear and Tear allowance for fully furnished lettings was withdrawn after 5th April 2016.

Can rental businesses claim on purchase costs?

Unfortunately, all costs and expenses associated with the purchase of your property are treated as part of the purchase price and cannot be offset against rental income for Income Tax purposes. These include:

  • Purchase price
  • Stamp duty
  • Legal fees
  • Building survey charges
  • Independent inspection charges
  • Auctioneer’s costs

However, it is important to keep a record of these costs as these can all be deducted from the gain (or added to the loss) when you sell the property and will reduce your CGT liability. Your solicitors’ completion statement should contain the majority of the costs within it for you as a starting point.

If your property purchase falls through, bear in mind that there is no tax relief for any of the costs that you have incurred.

What about private use?

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 relating to that period of occupation cannot be claimed. So any maintenance of the property prior to the first letting is private.

Talk to the experts

There are opportunities for reducing both your Income Tax and your Capital Gains Tax on your rental properties, so it’s good practice to keep a record of all costs, together with the supporting receipts, so that you can claim Capital Gains Tax relief for the expenditure when you sell. We always recommend seeking professional advice on calculating your allowable expenses. Contact us to speak one of our experienced tax team members.

Chartered Accountants in Sunderland, offering expertise on everything from Tax and Business Planning,
to Accounts and VAT.