Landlords Tax Services Ltd - The complete tax service for the residential property landlord

Technical notes

ALLOWABLE EXPENSES

• Just because you have spent money on your property portfolio doesn’t automatically mean you get tax relief
• Some items of expenditure never qualify for tax relief
• Some items of expenditure are only allowable against the gain when you sell the property
• Some items of expenditure may be deducted from rental income in calculating taxable income
• Some items of expenditure may not be claimed as a deduction but are subject to special rules

The costs and expenses associated with abortive purchases are never allowable. For example, if you are thinking of buying a property and pay to have it surveyed, and then decide not to proceed, there is no tax relief for the survey costs.

The costs and expenses associated with the purchase are treated as part of the purchase price and may be deducted from the gain (or added to the loss) when you sell the property. Such expenses might include legal (conveyancing) fees, survey fees, stamp duty etc. You should keep a record of these together with the supporting receipts so that you can claim relief for the expenditure when you sell.

The costs and expenses incurred in maintaining your rental income are generally allowable and fall into the following categories:

• Rent (including ground rent), rates, insurance and other like items that you pay whether the property is rented or not.
• Repairs, maintenance, renewals (see below for special rules).
• Finance charges and interest, including arrangement fees, mortgage interest etc (see below)
• Legal and professional costs including letting agents fees, accountants fees, legal fees on rent collection etc. (see below)
• Costs of services provided e.g. cleaning.
• Other expenses e.g. advertising, travel (see below), use of home as your office.

Repairs, Maintenance, and Renewals

First you must separate the fabric of the building from its furnishing and equipment. (Imagine it is turned upside down and shaken, what falls out is furnishing and equipment). For the avoidance of doubt, furnishings and equipment includes white goods, carpets and curtains but not fitted kitchens or central heating.

As regards the fabric of the building

• Maintenance and advertising costs incurred before or between lettings are allowable as long as they were incurred in contemplation of, or preparation for or during that letting.
• The cost of a replacement kitchen or bathroom is allowable against rental income. The cost of a new or extra bathroom, kitchen or any other facility is treated as part of the cost of the property and is allowable against the gain when the property is sold.
• The cost of replacing heating systems is allowable as are all decorating costs.

As regards the furnishings and equipment

• The initial expenditure never qualifies for tax relief.
• Repair and maintenance of the furnishings and equipment always qualifies for tax relief.
• You may EITHER claim the replacement cost of items when you replace them OR you may claim a Wear and Tear Allowance if the property is “fully furnished” .If it is not then only the replacement cost allowance is available to you.
• The Wear and Tear Allowance is equal to ten per cent of the gross rent received LESS the entry for Rent, (including ground rent), rates, insurance and other like items that you pay whether the property is rented or not. (If the rent is £20,000 and the entry for Rent, rates etc is £1,000 the wear and tear allowance will be £1,900)

As regards mortgage interest

• Only the interest is allowable. There is no tax relief for the repayments of capital. Always keep the mortgage interest certificates to evidence the figures included in your tax return.
• You may claim tax relief on mortgage interest if you re-mortgage as long as the aggregate value of the mortgage(s) does not exceed the value of your property when you first let it. For example Mr Jones bought a property for £100,000 in 1997 with a mortgage of £80,000. Then you he let it in, say, 2002 when it was worth £150,000 and it is now worth £250,000. He can remortgages it for £200,000 but only the interest on £150,000 of the loan is allowable because this was the value when he first let it. Interestingly it doesn’t matter what he does with the money. He can spend it on absolutely anything and it will still qualify for tax relief.

As regards legal and professional costs

• If the term of the lease exceeds one year then your legal fees for preparing the lease and the letting agent’s fees are not allowable. The legal and agent’s fees on renewing any lease of less than fifty years are allowable, but the legal and agent’s fees that relate to the payment of a premium on the renewal of a lease are not allowable.

As regards travel

• Travel expenses are allowable as long as the purpose of the travel was solely the maintenance of rental income. If you travel to your property, check it, instruct builders, visit the letting agent then travel back – the cost of travel is allowable. If you stop off on the way to visit a friend or do some Christmas shopping there is a duality of purpose in the visit and all the costs are dis-allowed. This is a particular problem (and a big temptation for those travelling to the UK from abroad. Don’t be tempted!

As regards your home office

• You may claim the additional costs you incur that you would not incur if you did not work from home. Normally this will be stationery and the additional heating and lighting cost. HMRC is particularly keen to stop landlords making unrealistic claims!

As regards training etc

• This will normally be included with “other items”. To the extent that the cost of training provides you with new knowledge then there is no tax relief. To the extent that it refreshes or updates existing knowledge then it is allowable.

DISCLAIMER
© Landlords Tax Services Ltd 2008 All Rights Reserved - In an article such as the one on this page we can only give brief general guidance and cannot cover all situations. This guidance may not cover all your personal circumstances and so you should not rely on it. Before taking action or not, always do your own specific research and seek appropriate professional advice which takes into account your personal circumstances, with the full facts of the case and all documents to hand. Neither Maurice Patry F.C.A. nor Landlords Tax Services Ltd can be held responsible for the consequences of any action or the consequences of deciding not to act.