Tax Return 2016-2017:
As a general rule, and as outlined in the previous articles in this series on tax returns, landlords can claim the expenses of running and maintaining their rental properties.
If the rent you charge includes additional services like water, or council tax, heating bills you will need to account for the full rental rent you actually charge, as your income. But you can then claim the costs as an expense against this income as allowable expenses.
The list below is not exhaustive and should be used as a guide only. Seek professional advice before submitting a tax return if you are not sure.
List of allowable expenses for an operating letting business
General maintenance and repairs, such as:
- Repairing water or gas leaks, burst pipes
- Repairing electrical faults
- Replacing broken windows, doors, gutters, roof slates/tiles (but not a whole roof)
- 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 (but putting in a damp course is an improvement and not allowed)
- Re-pointing, stone cleaning
- Hiring equipment to carry out necessary repair work
- Labour costs of these works (but not if you do the work yourself)
- Replacing existing fixtures and fittings, such as radiators, boilers, water tanks, bathroom suites, and kitchens, but not electrical or gas appliances
- Gardening and cleaning costs
Replacing domestic items, including:
- Kitchen crockery and utensils
- White goods such as washing machines and other appliances
- Curtains, carpets and other floor coverings, beds and freestanding wardrobes, atongwith the cost of getting rid of the old ones and having the new ones delivered, minus any money you make selling the old items
- Bills such as water rates, council tax, gas and electricity that you pay
- Letting agent and management fees
- Any landlord licence or registration fees charged by the council or local authority
- Gas safety checks
- Lease extensions of up to 50 years
- Costs incurred evicting a tenant
- Service charges, for exam pie, on blocks of fiats
- Water and other utility bills that you have to pay in between tenants, as long as the property is still available for renting
- Replacing a kitchen or bathroom of the same standard and layout
- Petrol/travel costs, but only if the sole purpose of the visit is related to your letting business and you tan only claim the actual cost of the journey, or, from April 2017, a cost of 45p per business mile
- A proportion of your household and stationery bills
- Replacing or repairing parts of the property that are broken or damaged, as long as it’s like for like and not an improvement
- All Subject to HMRC’s interpretation on a case-by- case basis.
The start-up costs
Generally, items purchased when setting up a property for letting for the first time – the initial purchases – are classed as capital items. This is the case before letting commences even when they replace existing items, such as carpets for example. They cannot be claimed against revenue because they will fail the replacement test.
The first tax return after letting is an important one as these initial purchase items need to be separated out and a long-term record kept of their cost. These costs can be set-off against capital gains when the asset (house) is sold. It is important therefore to keep good accounting records, with all invoices filed away safely, because the house many not be sold for many years and otherwise more capital gains tax (CGT) would be paid than is necessary.
HMRC says: “An item purchased for the first time does not qualify for any relief.” These same rules apply to repairs to the property and improvements before letting commences, they are all classed as capital expenditure.
Landlords may see these rules as unfair, but unsurprisingly the government does not see why it should burden the taxpayer with improving the lot of the entrepreneurial landlord when she buys a rundown property at a bargain price.
Some exceptions to the pre-letting rules include claims for new letting costs including marketing the property, letting agent’s fees, and for pre-letting gas and electrical safety checks. However, any work required following and as a result of these checks is not be allowed.
There are some caveats regarding initial purchases and repairs where costs can in fact be claimed. As this area is quite complex the following may require professional (accountant’s) advice and clarification.
Where a property is in a tenantable (habitable) state when it is purchased, then any subsequent repairs should be allowed. This is obviously one of those “grey” areas, but if the tenant will take the property regardless of a relatively minor defect, such as a loose gutter or roof slate, then any subsequent repairs should be allowed.
The work should pass the repairs test as it is non-essential to the tenant, it does not improve the property in any way, it fully qualifies as repairs, it is wholly and exclusively for the property lettings business, and is definitely not capital expenditure.
Also, for landlords with more than one property, already operating a lettings business, repair costs incurred setting up a second or subsequent properties for letting, should be allowed as deductible expenses, unlike those costs incurred leading up to the first letting.
The difference between capital and revenue costs is a complex area as testified by HMRCs over 100 pages in its operating tax manual on business income, and the long-running Odeon Cinema’s battle with HMRC – Odeon Associated Theatres Ltd v Jones
Examples of what can and cannot be claimed for:
- A portfolio landlord employing someone, including a relative, to manage and carry out repairs is claimable, but they must go through a proper payroll – on a Pay As You Earn (PAYE) basis, they will need to declare the income they receive to HMRC, and they will be entitled to register for employee pension contributions.
Most of the following cannot be claimed:
- Landlords can’t claim for their own time either operating as a landlord, or doing repairs. All claims must be backed by a legitimate invoice.
- Any capital items of expense, including things like building an extension or conservatory, adding a garage, fitting a burglar alarm etc. cannot be claimed against revenue.
- Upgrading or improving internal items, fittings furniture and appliances, cannot be the subject of a claim unless replacing with like-for-like costs.
- Extending a lease in excess of 50 years.
- Any expenses not wholly or exclusively for the letting business of or a tenuous nature, such as business suits, computers, phones or cameras etc.
- New items, repairs and replacements or work done to meet legal obligations prior to a first rental property letting.
- Any work that adds value to the property asset.
- Any work done preparing a rental property for sale, when vacant.
Submitting a Claim for Expenses
If you are doing this yourself you need to be confident that you have understood the rules pretty well, to be sure that your expenses are allowable. Pushing them through willy-nilly will risk an investigation, and possibly punitive fines if you are found to be in the wrong.
If you have a strong argument backed by good evidence and can show that you have applied HMRC’s own guide lines you should be in the clear – use the HMRC Property Rental Toolkit and the Property Income Manual – links below. Remember, ignorance of the rules is no excuse and it is your responsibility to understand them if you are not using a tax adviser.
Finally, this information applies to non-incorporated landlords. If you operate through a limited company your tax affairs will be become more complex, and you will need an accountant to deal with the annual company accounts. Instead of paying income tax on your rental income, you’ll need to file company accounts and pay corporation tax on your profits.
The Self-Assessment Tax Return, HMRC Form SA100, and Property income supplementary – HMRC Form SA105 – available here
Declaration of beneficial interests in joint property and income – HMRC Form 17
Filing your tax return online here
Free LandlordZONE Excel Tax workbook tool – download it here – https://www.landlordzone.co.uk/documents – go to Tax Tools & Documents
Next Article in the series – Mortgage Tax Relief?
HMRC is increasing its targeted compliance activity across the private rented sector through taskforce activity – see HMRC – Tackling the Hidden Economy
HMRC says it is encouraging those who have been non-compliant to come forward through activities such as the Let Property Campaign