Whatever the reason for becoming a landlord, expenses will be incurred relating to that property at some time or another. Unfortunately, just because a payment has been made does not necessarily mean it is an allowable deduction for income tax. Even if the payment is allowable, when tax relief can be claimed depends on the nature of the expense and the method by which the accounts are prepared.
The default basis for preparing letting accounts is the ‘cash basis’ where income is recognized when received and expenses when paid (providing that the expense is incurred ‘wholly and necessarily’ for the letting). The ‘accruals basis’ must be used where rental income exceeds £150,000 a year or the property business is run by a company. Under the ‘accruals’ basis, income is taxed when it is earned and expenses incurred rather than when paid. However, a landlord who is eligible for the cash basis can choose (‘opt’) to use the accruals basis if it is more beneficial to do so.
Usual day-to-day running expenses
To be allowable, the expense should be incurred ‘wholly and exclusively for rental. On their website, HMRC gives a list of claimable expenses you would expect to see including house insurance, letting agent’s fees, management fees, ground rent, water rates, and council tax (where not already paid for by the tenant), and restricted mortgage interest relief.
Other claimable expenses
Such expenses include rent insurance, expenses related to landlord regulations (e.g. Gas Safety Certificates/checks, EPCs, purchase of smoke and carbon monoxide alarms), legal expenses relating to eviction, cleaning services including end of tenancy cleaning, regular cleaning for Houses of Multiple Occupation and common areas when dealing with commercial lets.
Queries can arise when claiming what are termed ‘dual purpose’ expenses. A typical cost under this heading relates to expenses incurred in running a car used partly for the rental business and partly for private purposes, the business part being allowed. The two methods of calculation permitted are:
- 45p for the first 10,000 business miles incurred and 25p for any additional business miles or
- by totalling all costs (car tax, insurance, repairs, petrol, AA/RAC subscription), recording the mileage of every property-related trip made in the tax year and the total mileage, then claiming the proportion relating to the business mileage.
Administrative costs incurred in the running of a letting business can be claimed but again only if incurred ‘wholly and exclusively’ for letting purposes (e.g. phone bills, stationery, postage, accountancy fees). With phone bills the business proportion is claimed by working out the actual cost. Unfortunately, landlords cannot claim for their own time but a claim is possible to cover the additional electric, water etc that might be spent from running the business from home under the ‘simplified expenses’ claim. The claimable amount is calculated by using a flat rate based on the number of hours worked from home each month so long as the number of hours exceeds 25 hours or more a month as follows:
|Hours of business per month||Flat rate per month|
|25 to 50||£10|
|51 to 100||£18|
|101 and more||£26|
Another confusing area concerns the purchase of ‘white goods’. Increasingly landlords are obliged to purchase such items for tenants and assume that the cost is immediately claimable. However, for tax purposes the initial cost is a ‘capital’ expense and under the accrual’s basis, capital expenditure is not deducted when computing profits – only revenue expenditure is eligible for deduction. Relief for capital expenditure is instead given under the capital allowances rules and an important point to remember is that capital allowances cannot be applied to residential property (unless a furnished holiday let).
Relief is instead given under the ‘Replacement of Domestic Items’ rules such that it is only when these items are repaired or replaced can tax relief be claimed, providing the item is a ‘like for like’ replacement. Under the cash basis, capital expenditure is simply deducted (as for an expense) in working out taxable profits unless the expenditure is of a type for which relief is specifically disallowed.