This article looks at the types of expenses incurred in running a residential property business and what can be deducted from profits to calculate income tax. If an expense can be deducted from profits to calculate tax, it is called an allowable expense. It can also be called deductible or revenue expenditure.
Repairs to the property
Repairs are an allowable expense against profits.
But there are a number of rules which govern what is considered to be an allowable repair. Repairs will restore an item to its original condition. If the “repair” improves, alters or upgrades the item, then it is treated as capital expenditure and is not allowable.
If an item is improved only because this improvement has now become the industry standard, then it is an allowable expense. A good example of this is when replacing windows with double glazing or replacing lead pipes with copper/plastic pipes.
The following expenditure is always considered to be an allowable repair:
- Stone cleaning
- Painting and decorating
- Damp/rot treatment
- Broken doors/windows
- Replacing roof tiles, flashing & guttering
A common example given by HMRC is that of a fitted kitchen being refurbished, with old units, tiling, worktop, sink being replace and redecorating.
The kitchen is replaced with a similar standard kitchen, with similar materials and no extra storage space or equipment.
The whole expense is classed as a repair and is allowable.
If extra cabinets or equipment is being added, then this element is not allowable as it is an improvement and therefore capital expenditure. The total expense needs to be split between allowable and non-allowable.
If the fitted kitchen as a whole is being upgraded with substantially improved materials being used, such as with a designer kitchen, then the whole expense is treated as capital expenditure and not allowable.
Purchase of domestic items to be used in the property by the tenant
If you provide domestic items for the tenant to use in the property such as:
- Kitchen appliances
- Curtains, linen,
- Carpets and other floorings
The initial expenditure on these items are not allowable. But the amount paid for these items should be kept in the records.
However the replacement of these items are allowable under Replacement of Domestic Items relief. This relief has been available since 6 April 2016 and replaces the old Wear & Tear Allowance which ceased on 5 April 2017.
The amount that can be claimed under Replacement of Domestic Items Relief is the
- Like for like replacement cost of the item: This means that if the item is improved or upgraded ( e.g. a sofa being replaced with a sofa bed, or a single bed replaced by a double bed, you can only claim for the like for like replacement of the sofa/single bed)
- plus any delivery costs
- less any disposal proceeds from the selling the old item, include costs of selling too.
This relief is available whether you use the accruals basis or cash basis.
This relief does not apply to furnished holiday lettings or commercial property lettings.
Replacement and Repairs of Integral Features
These are fixed to the property and so are not removed when a tenant moves out or when the property is sold.
- Fitted kitchens
- Fitted bathrooms
Replacement with modern equivalents or repair of these items are generally allowable expenditure. However where these items are improved or upgraded then it is capital expenditure.
Work on newly acquired properties
If the property is bought in a state of disrepair, then expenditure to make it suitable for letting will be treated a capital expenditure if:
- The purchase price reflected the state of disrepair
- The property cannot be let without repair
- The property cannot be let long term without repair
Professional fees: legal, accounting, tax, surveyors
Fees incurred in relation to the purchase of a rental property is not allowable. Relief is given instead on the sale of the property via capital gains tax.
Fees incurred in the running of a business is allowable. Note that the accounting fees for preparing rental property accounts is an allowable expense. Strictly the accounting fee for preparing the landlord’s tax return is not an expense of the business but HMRC allow this to be included where the tax preparation fee is modest.
Expenses incurred prior to letting
Expenses incurred prior to letting is allowable expenditure if:
- It was incurred in the 7 years prior to the date the property rental business started
- It was incurred wholly and exclusively for the purpose of letting out the property
- It was not an expense that would have otherwise been allowable i.e. cannot be claimed elsewhere
- It would have been allowable if it had occurred after the rental business started i.e. meets all the rules explained above.
If the above conditions are met then the expenses are treated as being incurred on the day the business started, i.e. the date of the first let.
Dual purpose expenses
Sometimes a property is used personally by the landlord as well as for the rental business. For example, the landlord lives in one part of the property and the rest is let out. Property expenses incurred for both personal and business reasons need to be apportioned. E.g. council tax, water rates etc.
The expense incurred for the business needs to be meet the “wholly and exclusive rule”.
Purchase of a van:
Under the cash basis, the purchase of a van used wholly and exclusively for the business is treated as an allowable expense just like any other expense.
If the landlord is using the accruals basis, then the purchase of the van would qualify for capital allowances. The annual investment allowance would mean that the purchase would qualify as a deduction from profits.
Purchase of a car:
Under the cash basis, landlords cannot deduct the cost of buying a car. Instead landlords can claim capital allowances. Annual Investment Allowance is not available for cars. Instead there will be tax relief at 18% or 6% depending on the CO2 emissions of the car.
Running costs of vehicle e.g. MOT, insurance, fuel:
These are also deductible if the vehicles are used for business purposes only.
Vehicles used for both business and privately
Expenses can only be claimed where the business journeys are separately identifiable, so it is vital that records of business journeys are kept.
Capital allowances are also available for the business proportion of the purchase of vehicles.
Fixed rate mileage from 2017/2018
Instead of claiming actual expenditure and capital allowances, individual landlords can claim fixed rate mileage. This is irrespective of whether they use the cash basis or accruals basis.
45p per mile for the first 10,000 miles
25p per mile thereafter
24p per mile for motorcycles
If landlords claim the fixed rate mileage, no actual expenditure or capital allowances are allowable.
For each vehicle, the landlord must choose to claim fixed rate mileage or actual expenditure and/or capital allowances.
Where a trip has both a private and business element then it is all disallowable.
To be allowable as an expense, trips need to be only for business purposes.
Small plant and machinery expenses
These are plant and machinery used in the running of the property business such as lawnmowers, garden tools, computers, printers etc.
Where the landlord uses the cash basis, these can be claimed as an expense on payment.
Where the landlord uses the accruals basis, capital allowances can be claimed for these items of plant and machinery. With the Annual Investment Allowance, full relief is given.
Where the property is let rent-free or for less than market rent
Where it is let rent free, there will be no relief for any property expenses incurred.
Where property is let at less than market rent, then allowable expenses are restricted to the level of rents received.
This was introduced from 2017/18 for individual landlords only.
It applies to all lettings, commercial or residential, UK or overseas.
There are 2 ways of using the allowance:
Where rental receipts are less than £1,000 (both UK and overseas rents) then the landlord can choose not to tell HMRC. This means there is no need to complete an income tax return and consequently no income tax to pay.
In later years, should rental receipts exceed £1,000 then the landlord needs to inform HMRC.
Alternatively, the landlord can elect for full relief not to apply and complete a tax return as normal. This is likely to be beneficial if expenses are greater than £1,000.
If rental receipts are greater than £1,000, the landlord can choose to:
- Deduct property expenses in the usual way (be it cash basis or accruals basis) OR
- Deduct the £1,000 property allowance.
The landlord can choose year on year which treatment he prefers but must elect within 22 months of the end of the tax year.
Exclusions from the property allowance:
- Landlords who pay mortgage interest and are claiming the basic rate tax relief deduction for interest and finance costs.
- Where rent- a room relief has been claimed
- If rent-a-room income is greater than £7,500 and actual expenses are deducted.
- Partnership property rental businesses
Other points to consider:
Joint owners of a property each qualify for £1,000 property allowance.
Where the landlord has multiple businesses, the landlord can choose how to allocate the property allowance between the businesses, after taking into account losses brought forward from earlier years.
Property Rental Losses
Where a landlord has both a UK property business and an overseas property business, the losses in each business must be kept separately and cannot be offset against each other.
Losses of a UK property business can only be carried forward against future UK property profits or relieved against current year profits of a UK furnished holiday letting.
Similarly, losses of an overseas property business can only be carried forward against future overseas property profits.