Despite special restrictions that apply to residential lets the tax rules allow landlords deductions for the cost of running their property rental businesses. Not all of these are well known. Are you claiming all that you’re entitled to?
The same but different
At one time the tax rules for property rental businesses were entirely separate, although not dissimilar, from those for trades and professions. But around 25 years ago the rules changed so that the same rules apply, but with some exceptions. This created new opportunities for extra tax deductions which are often overlooked.
First letting – legal costs
The accepted view is that legal costs for drawing up a lease and other expenses, e.g. surveyor’s fees, associated with the first time you let a property count as capital expenditure and so aren’t tax deductible. This is because the lease only puts you in a position to start your rental business rather than run it. That’s certainly the story you’ll get from many tax advisors. However, it’s not entirely correct.
Tip 1. HMRC’s view is that where the first let is for a period of no more than one year, the legal etc. expenses can be deducted for tax purposes from rental income.
Tip 2. Even where the expenses aren’t deductible for a first let because it’s for longer than a year, they will be for the lease renewal if that’s for less than 50 years and doesn’t include a lump sum payment (usually referred to as a premium).
Deductible travel
If you make a journey that’s “wholly and exclusively” for the purpose of the rental business, for example, to deal with a complaint from a tenant, make a repair to a property or just to check its condition, you can claim the cost of travel from the place you manage the letting (often that will be your home) to the rental property and back.
Tip. If you use your car you can claim either a proportion of your motor expenses or HMRC’s mileage allowance. The latter is simpler to work out and often more generous.
Capital allowances
The usual story you’ll hear is that you can’t claim capital allowances (CAs, HMRC’s equivalent of depreciation costs) for equipment you buy for use in a residential letting business. That’s not wholly accurate. The legislation actually says you can’t claim CAs for equipment “for use in a dwelling-house”. HMRC interprets this as meaning equipment for use in the property by tenants.
Tip 1. You can claim CAs for equipment you buy to run your rental business. For example, tools with an expected life of more than two years, which you use to maintain your let properties. This can even stretch to a computer if that’s what you use to administer and manage your rental business. However, you must limit your claim proportionately to account for any non-business use.
Tip 2. The cost of tools etc. used to run the business which have an expected life of no more than two years is tax deductible as a general expense without you having to worry about the CA rules.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.