Ensuring you claim the correct rental expenses against your income for buy-to-let properties is not always obvious. The HMRC Property Income Manual can be found here.
This article written by RPP Accountants explains what can and can’t be claimed as a revenue expense for buy-to-let properties. HMRC have also produced other guidance for landlords here.
The starting point for any for expenses is that they cannot be deducted unless they are incurred wholly and exclusively for business purposes.
What are the correct Rental Expenses for Buy-to-Let Properties?
You or your company must pay tax on the profit you make from renting out the property, after deductions for ‘allowable expenses’. Allowable expenses are things you need to spend money on in the day-to-day running of the property, like:
- letting agents’ fees
- legal fees for lets of a year or less, or for renewing a lease for less than 50 years
- accountants’ fees
- buildings and contents insurance
- interest on property loans – for company’s only from April 2020 and a tax reducer for individuals
- maintenance and repairs to the property (but not improvements)
- utility bills, like gas, water and electricity
- rent, ground rent, service charges
- Council Tax
- services you pay for, like cleaning or gardening
- other direct costs of letting the property, like phone calls, stationery and advertising
- Allowable expenses do not include ‘capital expenditure’ – like buying a property or renovating it beyond repairs general maintenance work.
Travel rental expenses
The HMRC manuals explains the complexities behind travel costs. Landlords can claim the fixed rate mileage deductions, which are currently 45p per mile for the first 10,000 miles for a car being driven. Alternatively they can claim the costs of their car or van used for business purposes based on the mileage basis to establish the proportion of property business and private usage.
Travel expenses will not be deductible if the purpose in making the journey is partly private and, for example, includes a visit to the shops to buy weekly groceries. A landlord may claim a deduction for a journey made solely for business purposes if any personal benefit is incidental. For example, where they happen to stop on the way to pick up a newspaper.
When using a letting agent to collect rents, organise services etc. Where a letting agent carries out all (or virtually all) the duties relating to the letting activity, it is likely that the rental business is being conducted through the agent. In such circumstances, the business ‘base’ is likely to be the agent’s office, and travelling expenses from the customer’s home will not normally be allowable.
When is a repair a Revenue or Capital expense?
Allowable rental expenses (revenue expenses) include the costs of maintenance and repairs to the property (but not ‘capital’ improvements). 2 case laws helped to shape what could be counted as revenue or capital expenditure.
- LawShipping Co Ltd v IR Commrs (1923) 12 TC 621 – the repairs were deemed to be capital as they effectively brought the asset to life as the ship as otherwise it was not seaworthy and could not generate an income.
- Odeon Associated Theatres Ltd v Jones(1971) 48 TC 257 – the repairs were deemed to be revenue expenses as on the following basis:
- the purchase price of the cinemas was not affected by their state of disrepair;
- the cinemas could be used to earn profits immediately following their purchase; and
- the accountancy treatment permitted the expenditure to be written off as revenue.
Thus, when a company is buying property, it should be prepared to demonstrate that the property can be ‘commercially’ used on acquisition to avoid any suggestion that repair or restoration work is a disallowable ‘capital’ cost under the ‘Law Shipping’ principle. In some cases, if the repair programme can be deferred for a few years, there may be a better chance of obtaining tax relief! If a repair is deemed to be a capital expense then it may form part of the base cost of the property for when it is disposed of.
A repair restores an asset to its original condition, sometimes by replacing parts of it. Property repairs can include:
- replacing roof tiles blown off by a storm,
- replacing a broken-down boiler or
- redecoration between tenants to restore the property to its original condition.
Replacing a part of the property with the nearest modern equivalent is still a repair if the improvement is incidental to the repair, such as replacing a single-glazed window with a double-glazed window.
Typical maintenance and repair costs a landlord may incur, and which you can claim against your rental income:
- repairing water or gas leaks, burst pipes
- repairing electrical faults
- replacing broken windows, doors, gutters, roof slates/tiles
- repairing internal and external walls, roofs, floors
- repainting and redecorating (but not improving) the property to restore it to its original condition
- treating damp or rot
- re-pointing, stone cleaning
- hiring equipment to carry out necessary repair work
- replacing existing fixtures and fittings, such as radiators, boilers, water tanks, bathroom suites, and kitchens, but not electrical or gas appliances
If you have an insurance policy that covers the cost of some repairs to your property, you can only claim the additional expenses that you incurred for repairs which the insurance pay-out did not cover.
This also applies if you keep your tenant’s deposit from a Tenancy Deposit Scheme to cover damages they have caused to the property. You can only claim expenses incurred for repairs in excess of the amount of the deposit that you retained.
Supplying of Domestic Items
April 2016 saw the introduction of the replacement of domestic items relief. Broadly this allows for the replacement (not initial purchase) of certain domestic items.
In order to make a claim for relief 4 conditions need to be met:
- Condition A – the individual or company looking to claim the relief must carry on a property business (letting of a dwelling-house(s)).
- Condition B – an old domestic item that has been provided for use in the dwelling-house is replaced with the purchase of a new domestic item. The new item must be provided for the exclusive use of the lessee in that dwelling-house and the old item must no longer be available for use by the lessee.
- Condition C – The expenditure on the new item must not prohibited by the wholly and exclusive rule (see BIM37000) but would otherwise be prohibited by the capital expenditure rule (see BIM35000).
- Condition D – Capital Allowances must not have been claimed in respect of the expenditure on the new domestic item.
If the 4 conditions are met, then a deduction for the expenditure on the new item can be claimed.
However, a deduction is not allowed if:
- The dwelling-house in question is, in full or part, a furnished holiday letting
- Rent-a-Room receipts have been received in respect of the dwelling-house in question and Rent-a-Room relief has been claimed in relation to those receipts.
Domestic Items can you claim
You may be able to claim tax relief on money spent on replacing a ‘domestic item’. This is called ‘replacement of domestic items relief’. A domestic item is an item for domestic use such as:
- Moveable furniture (sofas, tables, bed frames etc)
- Furnishings (curtains, rugs, carpets etc)
- Household appliances (fridges, freezers, washing machines etc)
- Kitchenware (utensils, crockery, cutlery etc)
This list is not intended to be complete but gives an idea of the assets that are domestic items and would qualify for ‘Replacement of Domestic Items Relief’.
However, fixtures are not domestic items and do not qualify for ‘Replacement of Domestic Items Relief’. Fixtures are:
- Any plant or machinery installed or fixed in or to a dwelling-house such that it becomes part of that dwelling-house
- Any boiler or water-filled radiator installed in a dwelling-house as part of a space or water heating system
Examples of fixtures:
- Fitted furniture that has become part of the dwelling-house (e.g. built in wardrobe and cupboards)
This list is not intended to be complete but gives an idea of the assets that are fixtures and would not qualify for ‘Replacement of Domestic Items Relief’.
If your total expenses or income is below £1,000 then you should elect/claim the rental allowance deduction. This would either mean no taxation is due or your tax liability will be reduced.
There are lots of obligations to running a rental property and the Government have a page to assist landlords with buy-to-let properties.
We have produced this brochure detailing how we can assist those with property businesses.
Most types of rental expenses for buy-to-let property businesses are clear but care must be taken. Knowing whether you can claim an expense as a repair and rental expense or as capital is based upon the facts. RPP Accountants can help assist you with your rental expense claims.
If you wish to speak to a member of our team, please contact us.
Find more information about property tax together with our expert advice and guidance.