This article is intended as general guidance only and does NOT constitute accountancy, tax, financial or other professional advice. The author and Jungle Property make no representations or warranties with respect to the accuracy or completeness of the contents of this article and cannot accept any responsibility for any liability, loss or risk, personal or otherwise, which may arise, directly or indirectly, from reliance on information contained in this article.
This article provides a brief guide for what is a big topic. We highly recommend How To Save Property Tax by Carl Bayley which explains tax in much more detail.
The rules on what types of expenditure may be claimed as deductions in a property letting business are like those for other types of business, although there are some significant differences. Some of the main deductions are listed below, collected under the categories used on the tax return.
The box numbers quoted here are from Page UKP 2 of the tax return, as it applies to normal UK property letting, although most of the deductions listed may also be claimed in the other types of property letting businesses.
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Rent, Rates, Insurance, and Ground Rents (Box 24)
Includes service charges, etc. Costs such as Council Tax incurred by landlords during void periods can also be included.
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Property Repairs and Maintenance (Box 25)
Includes repairs to furniture and other equipment supplied with a property.
There are two fundamental principles we must consider to determine whether expenditure represents a repair (revenue expenditure) or a capital improvement (capital expenditure).
- When a property is first brought into the rental business, any expenditure necessary to make it fit for use will be capital expenditure. In most cases, a property will first be brought into use when purchased, but the same rule applies when an inherited property or former home becomes a rental property.
- Subject to (1) above, expenditure that merely restores the property to its previous condition (at a time earlier in the same ownership) will be a repair. Conversely, any expenditure that enhances the property beyond its previous condition within the same ownership will be capital improvement expenditure.
It is important to bear these fundamental principles in mind: they lie at the heart of the whole ‘capital or revenue’ question for any expenditure on property.
The question of what constitutes an enhancement to the property is determined as a question of fact, not opinion. Just because you think a new extension on a building is hideous does not stop it being classed as an improvement for tax purposes.
Repairs are deductible for Income Tax purposes (as long as the property is a rental property at the time) whereas capital improvements may be deductible for CGT purposes.
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Non-Residential Property Finance Costs (Box 26)
You should also include any finance costs not related to borrowings (e.g., bank charges on a current account in credit), even if related to a residential property letting business.
There are restrictions on the rate of tax relief available to residential landlords for interest and finance costs. which interest and finance costs are eligible to be claimed in the first place…..
Interest is allowable and may be claimed against rental income if it is incurred for the purposes of the property business. There are two ways this can occur:
i) The interest arises on funds that have been utilised in the business, or
ii) The interest arises on capital introduced into the business
For the first item above, interest relief will only be available for borrowings in excess of the capital introduced in respect of a property if these additional borrowings are used for business purposes.
For the second item, interest relief will be available on any borrowings against a rental property up to its original value when first rented out PLUS all the other capital expenditure incurred in purchasing it and preparing it for letting. It does not matter what the borrowed funds are used for! Later, additional, capital expenditure on a rental property, such as capital improvements, counts as further capital introduced.
Interest Relief Restrictions
Against fundamental principles under which businesses are taxed in the UK, the Government has introduced restrictions on tax relief for interest and finance costs paid by residential landlords – known as Section 24. These restrictions do not apply to:
• furnished holiday lets up to 2024/25 (Section 9.23)
• Landlords renting out non-residential property
• Property investment companies
The restrictions do, however, apply to all individuals renting out ‘normal’ residential property in the UK or overseas; including those operating as an individual in their own name, as joint owners, through a partnership, or
through a trust. From 2020/21 onwards, tax relief for interest and finance costs relating to residential property lettings is restricted to basic rate only (a partial restriction applied from 2017/18 to 2019/20).
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Legal, Management, and Other Professional Fees (Box 27)
Includes:
- Letting agent’s fees
- Advertising for tenants
- Accountancy fees
- Legal and professional fees
Revenue expenditure may be claimed as a deduction against rental income. These are the costs incurred year in, year out, in earning rental profits. They will include items such as debt collection expenses, agent’s fees, and accountancy fees for the preparation of your annual accounts and the business element of your tax return.
If your property business is the only reason you are required to submit a tax return, then it will be reasonable to claim a deduction for all the fees incurred for preparing and submitting the return rather than merely the business element.
Legal and professional costs relating to a tenant’s lease are allowable (e.g., legal fees for preparing the lease). HMRC regards any expenses connected with the first letting of a property for a fixed term of more than one year as a capital expense that cannot be claimed. Costs relating to subsequent long leases will be allowable provided the new lease is on broadly similar terms and for a period of less than 50 years and the property has not been used for another purpose in the interim.
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Costs of Services Provided, Including Wages (Box 28)
Includes:
- Heating, lighting, and other utilities, if borne by the landlord. Costs incurred during void periods can be included.
- The cost of cleaners, gardeners, etc., where relevant
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Other Allowable Property Expenses (Box 29)
Includes:
- Bad debts – unless there are exceptional circumstances, or late payment arrangements in place, you may claim any sums that were due at your accounting date, and which are now more than three months overdue, as a bad debt.
- Licence fees (e.g. for a HMO licence or selective licensing scheme)
- Professional subscriptions (e.g. membership of the National Residential Landlords Association)
- Training and research – any costs incurred in researching potential purchases, looking at available mortgage deals, attending property shows, and anything else to help you set up, or expand, your business should generally be allowable. The cost of books, magazines, and other information purchased for business purposes is usually allowable. This covers not only industry-specific publications, like trade magazines, but also books and other publications you buy to help you meet your legal and taxation obligations. Books which keep you updated with developments in the field of property taxation, are therefore generally tax deductible. The expenditure must be relevant to your business.
- Landlord’s administrative expenditure:
- Use of home and other premises costs – Many people run their property business from a room in their home. In these cases, the taxpayer may claim an appropriate proportion of their household bills as a business expense. The proportion to be used is based on the number of rooms in the property, excluding bathrooms, toilets, kitchens, landings, and hallways. The claim should be further restricted where there is also some private use of the part of the property used in the business.
- Motor expenses – The cost of running vehicles used in your business may be claimed as a business expense. The vehicle will also have some private use, so an appropriate proportion is claimed. (Or a proportion is disallowed, depending on how you look at it and how you draw up your accounts.) The appropriate proportion to claim will vary from one taxpayer to the next. If you were to buy a vehicle purely for use in your business, a 100% claim might be justified. Typically, however, for a self-employed individual with a property trading business, the business use will fall in the range 50% to 75%; for landlords with property investment businesses it will tend to be somewhat lower, perhaps 15% to 30%; but these are only rough guides and the appropriate claims may be considerably higher or lower in some cases. You will need to work out the appropriate proportion to apply in your own case based on the specific facts supporting your claim. Keeping a mileage log to record your business journeys is the best way to do this
and is highly recommended, although not everyone does this. - Telephone and broadband – The cost of business calls and other business use of telephone lines, broadband, etc., may be claimed. A detailed analysis of business and private use should be carried out but, in practice, a reasonable estimated allocation will usually be acceptable. A suitable proportion of line rental and other service charges can also be claimed.
- Travel and Subsistence – Travel costs incurred for business purposes should be allowable. This might include the cost of:
- Visiting existing rental properties or development sites
- Scouting for potential new properties or sites
- Visiting your bank, mortgage broker, solicitor, or accountant
- Visiting hardware stores to purchase goods for your business
- Visiting property shows, exhibitions, courses, etc.
Where your trip necessitates an overnight stay, you will additionally be able to claim accommodation costs and subsistence (meals, etc.). Care needs to be taken, however, in the case of any travel with a dual purpose. Travel, subsistence and accommodation costs will only be allowable if your trip was purely for business purposes, or if any other purpose was merely incidental.
- Other items – Postage and stationery, professional subscriptions (where relevant to your business); computer and IT costs (where these are capital in nature, they can be claimed for capital allowances purposes.
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Costs of Replacing Domestic Items (Box 36)
This covers the replacement of moveable items within a normal residential letting. Under replacement of domestic items relief, residential landlords may claim the cost of replacing furnishings and other moveable items, including:
- Furniture
- Electrical equipment
- Free-standing ‘white goods’, such as fridges, dishwashers, etc.
- Carpets and other floor coverings
- Curtains, blinds, etc.
- Soft furnishings (cushions, lampshades, etc.) and bed linen
- Cutlery, crockery, and cooking utensils
Any sale proceeds received on the disposal of the item being replaced must be deducted from the replacement cost claimed. Disposal costs may be added to the claim. The relief does not cover the costs of the original furnishings when the property is first let out, or the cost of additional items.
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Residential Property Finance Costs (Box 44)
Interest and finance costs related to normal residential property letting. These are not allowed as a proper deduction anymore and only provide basic rate relief: hence why they must go in a different box on the tax return.
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