As a landlord, you are running a business and as a business owner, there are certain costs that you can expense as part of running your business which then get excluded as far as calculating an end of year profit and the tax liability that goes with that. In this guide we will take a look at the types of expenses that a landlord can claim.
This is quite a complex area so we would always advise a landlord to take advice from a qualified tax professional.
As you’d expect tax is a complex area and when it comes to tax relief for landlords there are several different aspects:
- Some expenditure is only allowable against the gain when the property is sold.
- 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.
Let’s take a look at these one by one.
Selling a property – claim against gain
When you sell a rental property, as it is essentially a second home which is not your main residence, you will be liable for capital gains tax, but you can offset some of the purchase costs against the gain. The costs that can be offset are:
- Purchase price
- Stamp Duty
- Legal Fees
- Building survey charges
- Independent inspection charges
- Auctioneer’s costs (for those of you who have bought through auctions)
Make sure that you get a full financial statement at the end of the purchase from your solicitor and keep any relevant receipts.
Expenses to offset against rental income
There are several buckets of expenses which can be offset against rental income for the purposes of calculating profit. It must be noted, here, that these expenses must be incurred solely as part of running the rental business.
- Finance costs: Any interest or arrangement fees paid on a mortgage or loan. This can be claimed at 20% of the cost as tax relief rather than an offset against the rental income.
- Repairs and maintenance. As long as the repairs and maintenance are not considered a capital improvement, then repair and maintenance costs can be claimed against rental income
- Legal, management and accountancy fees: Any fees associated with contract renewals, rent collections, evictions, management fees or accountancy fees can be claimed
- Insurance: premiums for property and contents insurance can be claimed
- Rent, rates and council tax: If there are any void periods where you have to pay these expenses then they can be claimed back against income.
- Wages: If you employ someone to do things such as cleaning or gardening then you can claim their costs as well. We would advise all landlords to be careful when “employing” someone’s services as they could be considered an employee.
- Travel expenses: These can be claimed if you need to travel to and from the rental property to deal with any issues then you could claim these. They have to be reasonable and if you are, say, visiting relatives in the area and happen to pop in, then the costs would probably not be seen as reasonable.
- Administration expenses: These are costs such as postage, phone calls, stationery and the use of a home office. Claiming for use of a home office can be done in two ways. This great little guide explains them well.
You cannot claim for capital improvements against rental income. So, any significant improvements or repairs which lead to an improvement would be classed as a capital expense. This is not something that is 100% black and white, though. The Government gives the following guidance:
Expenses are ‘capital expenses’ if they will be used in the business over a longer period of time, such as when you:
- add something to the property that was not there before
- alter, improve or upgrade something that was existing
- include the purchase of furnishings and equipment for the property
Capital expenses are not allowable and cannot be claimed against your rental income but you should keep records of them as you might be able to set them against Capital Gains Tax if you sell the property in the future.
Examples of capital expenses that would not normally be allowable:
- adding an extension
- installing a security system if there was not one before
- replacing a kitchen with one of a higher specification
If you carry out work on a property before leasing or renting then some costs of work on a property before you lease or rent it will be capital expenses, and therefore not allowable expenses. This includes if you buy a property in a derelict or run-down state, and either you paid a substantially reduced price for it or it was not in a fit state for rental.
Any works done to put it back into a fit state for letting are unlikely to be repair works. They will be capital works as they will improve the property. The costs for these works will not be an allowable expense.
Remember here that capital expenses, as mentioned above, can be claimed back against any capital gains tax liability so records will still need to be kept. They are just offset at a different time.
We hope you found this overview for expenses and allowances landlords can claim, useful. The information contained in this article should not be relied upon as a replacement for professional advice. We would advise that in all aspects of managing your business, that you seek advice from an appropriate professional that will view your entire circumstances and will give advice specific to you.