This is a Guide to Tax Deductible Letting Expenses for Landlords under the new tax rules following the Summer Budget 2015. These may be subject to change and you are advised to consult a tax specialist before making any decisions.
From April 2016 landlords will no longer be able to automatically deduct 10% for wear and tear. At the moment landlords providing furnished property can deduct 10% of their rent for wear and tear irrespective of their expenditure.
From next April a new replacement furniture relief will mean landlords will only be able to claim for costs they actually incur however it will apply to all residential property even if it is not furnished. The relief will not apply to Furnished Holiday Lettings or commercial property.
The following year will see the beginning of the end to the higher rate of mortgage interest relief on residential property, which will be phased in over a four year period so it is going to be vital all landlords keep accurate records and know what they can claim for.
HM Revenue & Customs has announced the scope of the changes here with a closing date of 9 October 2015 for comments.
Under the new relief landlords will be able to claim for the capital cost of replacing furniture, furnishings and appliances provided for their tenants use. Such items will include:
• Dining furniture
• Soft furnishings
• Kitchen appliances
Any proceeds from the disposal of the replaced asset will be taken into account before the relief can be claimed. If the replacement asset is an improvement on the old one then relief will only be given on the cost of a like for like replacement. The example HMRC use in the consultation document is replacing a washing machine with a washer dryer.
The replacement of integral fixtures which would not normally be removed if the property was sold, such as kitchen furniture/units, bathroom furniture and boilers will continue to classed as a deductible expense as property repairs.
Wholly and exclusively for business purposes
To be tax deductible, expenses must be incurred ‘wholly’ and ‘exclusively’ for the purposes of running your property letting business. Expenses are considered money spend during the day-to-day running of your business.
Rental income must be reported on a self-assessment tax return if this income is more than £2,500 a year.
Tax deductible expenses:
Professional fees typically include fees charged by your accountant, solicitor or letting agent. You may also deduct fees relating to rent collection. However these fees must still be incurred ‘wholly and exclusively for business purposes’. If professional fees relate to the sale or purchase of property, the fees will be considered capital expenditure and thus will not be tax deductible. This typically includes solicitor’s and surveyor’s fees relating to the sale or purchase of property.
If fees relate to a first time letting or subletting for a duration of more than one year, these fees are considered capital expenditure too. Professional fees relating to the lease’s renewal are tax deductible as long as the renewal period does not exceeding 50 years.
Advertising and marketing costs
Advertising and marketing costs are tax deductible provided they are wholly and exclusively incurred for business purposes. Landlords will typically advertise in various ways such as in local newspapers or online in order to attract new tenants.
However advertising and marketing costs incurred during the sale or purchase of property is not tax deductible since these costs are considered capital expenditure.
Repairs and maintenance
Costs incurred in order to keep the property in a good state of repair are tax deductible. Typical examples of allowable repairs and maintenance costs include:
• Exterior and interior painting and decorating
• Damp/rot treatment
• Fixing broken doors and windows
Significant renovations, extensions and improvements which add value to the property are not allowed.
Bad debts (unpaid rent)
Unpaid rent is considered a ‘bad debt’. Bad debts must generally remain unpaid for six months before you can consider them a legitimate business expense. HMRC will also want to see evidence of your attempts to collect the outstanding debt. If a tenant later pays his or her rent you must declare this as income on your tax return.
Protective clothing, tools and uniform costs
If you employ staff to carry out manual jobs on your properties, you may deduct the cost of providing protective clothing, tools and uniforms from your pre-tax profits. Click here for more information.
Computer consumables and hardware costs
Both computer consumables and hardware costs may be deducted from your pre-tax profits. This includes items such as printer ink, PC repairs and PAT testing of equipment. This does not include the cost of buying a new computer since this would be considered capital expenditure.
Wages and Subcontractors
Staff wages are a legitimate business expense which you can deduct from your pre-tax profits. This includes staff PAYE and NIC. If you employ subcontractors to do any work at the property then the cost is tax deductible.
Provided the reason for travel is wholly and exclusively for business purposes you may deduct the cost of travel from your pre-tax profits.
You should maintain a log of all trips both private and business related.
The cost of insuring your property is tax deductible. This covers both buildings and contents insurance. Insurance against loss of rents is also deductible from pre-tax profits. Click here and for more information.
If you take out a mortgage to pay for property you now rent, you may deduct interest payments from your pre-tax profits. Click here form more information. Capital loan repayments are not deductible since these are considered ‘capital costs’.
Cost of ‘providing services’
You may deduct costs of providing services as long as these services are considered part of your rental business and not a trade distinct from that business. Allowable services include the cost of gardening and cleaning the property. Services such doing tenants’ laundry is likely to amount to a trade and will therefore not be deductible from your pre-tax profits. You may deduct the cost of water, gas and council tax rates if the letting agreement makes these items the responsibility of the landlord. Click here for more information.
Cost of evicting a tenant
The cost of evicting an unsatisfactory tenant in order to re-let the property is an allowable deduction from pre-tax profits. This comes under the ambit of professional fees explained above.
Expenses incurred before your rental business began
Expenses you incurred before your rental business started are tax deductible. The expenses must have been incurred within seven years before the start of your business and have been incurred wholly and exclusively for the purpose of preparing your property business for trading. HMRC asks ‘would the expense item in question been allowed as a deduction if it had been incurred after the rental business started?’
Other general administration / office costs
The cost of telephone calls printing postage and stationery which relate to your business are tax deductible.
Use of Home as Office
If you work from home then you are able to claim an amount for doing so. HMRC will not challenge reasonable claims for minor use of home however do not give an indication of how much. One would assume it reasonable that claims equal to the £4 per week HMRC allows homeworking employees will be accepted without query. However it is possible to make a bigger claim to claim a proportion of the costs of working from home by using a reasonable formula to come up with a calculation or use the simplified expenses
That’s it for now
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