As a landlord, you can claim certain expenses as allowable expenses for tax purposes. These expenses can include utility bills, maintenance and repairs, insurance, service fees, travel expenses, and professional fees.
However, personal expenses cannot be claimed. You need to keep thorough records of your expenses and ensure you’re aware of the rules around expenses for furnished holiday lets.
General maintenance and repairs are deductible, but upgrades do not tend to be deductible in the same way.
Utility bills and insurance can also be claimed as allowable expenses. Professional fees like solicitor fees, estate agent fees, and letting agent fees are allowable expenses, but fees incurred as a result of breaking the law cannot be claimed.
Travel costs for business purposes can also be claimed. Direct running costs such as property management fees, locksmith fees, and cleaning and maintenance services are also allowable expenses.
What Are Allowable Expenses?
When it comes to business costs in a buy to let, allowable expenses play a fairly significant role.
They are the essential expenses that are incurred by businesses, but fortunately, they are not subjected to taxation. In other words, you don’t have to worry about paying taxes on these particular costs.
To illustrate, let’s say a buy to let property has an annual turnover of £15,000. Out of this amount, they spend £2,000 on allowable expenses. The beauty of it is that they only need to pay taxes on the remaining £13,000.
Now, most small businesses are eligible to claim allowable expenses, which is great news. However, there are a few exceptions to keep in mind like if you make use of the tax-free ‘trading allowance’ of £1,000, you cannot claim allowable expenses.
This is something new for buy to let properties and limited companies have their own set of rules that apply in this regard.
What does ‘wholly and exclusively’ mean?
When it comes to calculating income tax and corporation tax, there’s an important condition that needs to be met in order for an expense to be considered deductible.
This condition is known as being “wholly and exclusive” for the purpose of your trade, profession, or the job that you do.
While the legal definition for this requirement is concise, the law in general is fairly hard to define when you apply it to the real world.
As a result, the courts have been tasked with deciphering the precise meaning of this term across a wide range of industries and HMRC dedicate a significant number of pages to this topic.
In this discussion, we’ll delve into the general principles, significant cases, and provide guidance on how to approach the task of determining whether an expense qualifies as allowable in a buy to let property.
Allowable expenses for buy to let landlords
When you take out a loan to buy or improve a rental property such as a buy to let, you may think this is a buy to let allowable expense but most of the time it isn’t.
Also, if you have a repayment mortgage, it’s important to note that only the interest portion of the mortgage qualifies as finance cost. Not the entire repayment amount.
This means if your mortgage repayment was £200 and it is an interest only mortgage, you can deduct the whole entire paycheck.
But, if you have a commercial property, furnished holiday let or residential property owned by limited liability companies, you’re in luck because you can fully claim the finance costs.
As you can tell, there are situations where buy to let allowable expenses are obviously able to be claimed. Also, there are situations where buy to let allowable expenses are not able to be claimed so easily.
Buy-to-let allowable expenses and non allowable expenses
When claiming allowable expenses, it’s important to distinguish between business costs and personal expenses as you can’t claim private purchases as allowable expenses.
Below, all of the allowed expenses which can be written off a tax bill in a buy to let property are written down
For small businesses and freelancers who have buy to let property, it’s common to have expenses that cover both business and personal costs. Under these circumstances, only the business costs can be claimed as allowable expenses. Learn more about this using this link.
For example, you use your car to drive to meetings with clients, but you also use it to get around outside of work. You spend £200 a month on petrol.
You calculate that you use 25% of the petrol during work-related trips (not including journeys between home and work). You can therefore only claim £50 a month as an allowable expense for fuel.
To start, let’s talk about finance costs associated with rental properties. This includes the interest paid, arrangement fees, and even bank charges for a separate rental property bank account.
This is, if you’ve taken out a loan to purchase or improve the property.
However, if you have a repayment mortgage, it’s important to note that only the interest portion is considered a finance costs, not the total repayment of the mortgage.
For instance, if you own commercial properties, furnished holiday lettings, or residential property.
You will be in luck if you own them through limited liability companies as you can fully claim the finance costs without any restrictions.
However, for other residential properties owned by individuals or partnerships, there’s a restriction to be aware of as starting from April 6th, 2020, the finance costs are limited.
You can only claim 20% of the finance costs against your tax liability on the net rental income and this calculation is only done after deducting all other expenses and losses carried forward.
Nonetheless, before considering any finance costs. It’s worth noting that before April 6th, 2020, this restriction was gradually phased in over a three-year period.
You can fairly easily explain this by using examples. For instance, if you had someone who is in the 40% tax band and they bought a buy to let property as an investment.
This would enable them to have a relatively low debt on the property and the finance costs would then have to be broken down as follows:
|The amount that is taxable
|The amount of costs that are deductible
|The mortgage interest
|The profit on rent
|The tax paid at 40%
|Net rental income
Looking at the table, you will then be able to see that there is a 53.51% tax rate which is more than the original marginal rate of 40%.
As a result, if you are a basic rate taxpayer, this would mean you would have the full relief provided. This is only given if the basic rate taxpayer doesn’t fall into a higher tax band.
Do you travel to the property to carry out maintenance or deal with issues with the tenants? If so you should claim the cost of travelling.
It does have to be reasonable – if you live in London and spend a week on holiday in Cornwall, popping in for ten minutes to check that the holiday home next door was alright would not make the journey a business trip! If you travel by car, you can now claim the authorised mileage rates which are 45p per mile for the first 10000 business miles in a tax year and 25p per mile for each additional business mile.
These can include postage, stationery, telephone calls and other administrative expenses. The rules for claiming the use of home as an office have changed from 6th April 2013 here.
Either a complex calculation has to be made justifying the charge or the following can be claimed depending on the hours worked in an office:
Buy-to-let allowable expenses and non allowable expenses
Below are a list of the non-allowable expenses for buy to lets and how they compare to the allowable expenses.
Interest is what you pay for borrowing money, and what banks pay you for saving money with them.
Interest rates are shown as a percentage of the amount you borrow or save over a year. So if you put £100 into a savings account with a 1% interest rate, you’d have £101 a year later.
Personal expenses are costs that are beyond your tuition and fees, room and board, books and supplies, and transportation.
Personal expenses include necessities like laundry, cell phone service, clothing, personal care products, prescriptions, car insurance and registration, recreation, and more.
Colleges estimate these personal expenses based on prior data collected by past students.
When you budget for your personal expenses, consider that the costs will vary based on your living situation and your proximity to campus.
To budget, be sure you consider all the possible expenses that you will need to manage. Once you know the full picture, you can get creative to eliminate or reduce your expenses.
Capital expenditures (CapEx) are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. CapEx is often used to undertake new projects or investments by a company.
Making capital expenditures on fixed assets can include repairing a roof (if the useful life of the roof is extended), purchasing a piece of equipment, or building a new factory. This type of financial outlay is made by companies to increase the scope of their operations or add some future economic benefit to the operation.
Relief For Replacing Domestic Items
If your property is let furnished, you can claim tax relief on replacing domestic items – this means moveable furniture such as beds, carpets, curtains and appliances including washing machines, fridges and TVs. This relief only applies if you are replacing an existing item – so you can’t claim for furnishing the property in the first place.
The item must be solely for use by the tenants and the old item must no longer be available to them. However, you can claim for the cost of disposing of the old items.
You can only claim for a like-for-like replacement, not for upgrading to a more expensive model.
Claiming part expenses
You can claim allowable expenses through your annual Self Assessment tax return. You don’t need to submit proof of your expenses when you submit your tax return, however, you may be asked by HMRC to show evidence of your costs. It’s therefore important to keep complete, accurate records of your expenses throughout the tax year.
How Does The ‘Replacement Of Domestic Items Relief’ Work?
You can deduct the cost of your replacement items from your rental income when calculating your profit.
To calculate the allowable deduction for a new item, take the cost of the replacement item (limited to the reasonable cost of an equivalent item if you chose to upgrade) plus the any costs associated with disposing of the old item or acquiring the new one minus any money your received for the old item.
Landlords are eligible for a property tax allowance of £1,000. If your taxable income from property is less than £1,000 you do not need to declare it to HMRC or pay any tax on it.
If your rental income exceeds £1,000, you can choose to deduct your property allowance from your rental income rather than deducting your actual allowable expenses. The best option will depend on the amount of costs you have incurred.
If you claim your property allowance, you cannot also claim a deduction for your expenses.
Changes Coming Up In 2024
The government are phasing in ‘Making Tax Digital’ (MTD) rules, and further changes will come into effect in 2024. Most VAT-registered businesses are already required to comply with the rules. However, from 6th April 2024, landlords and self-employed people with a turnover or rental income over £10,000 will also need to use MTD software.
Landlords must find a compatible software solution to keep the correct digital records, including allowable expenses, to stay on the right side of HMRC.
Our guide of what is and isn’t an allowable expense for landlords is not exhaustive. However, we have summarised the key ones to help you understand what you can offset against tax as an allowable expense.
What are the changes to landlords’ wear and tear allowance?
Previously, if you were letting out a fully furnished property, you used to be able to claim for wear and tear of furnishings, such as cookers, carpets, beds and televisions. Previously, the allowance meant that you could claim 10% of the net annual rent each year.
This has now been replaced with Replacement Relief, which applies to all rented properties, not just furnished homes. You can claim back anything that you spend on replacing a ‘domestic item’. It’s worth noting that you can’t claim tax relief on the cost of adding a kitchen for the first time or furnishing the property from scratch.
How can buy to let investors claim tax relief on capital costs?
Initial capital costs for purchasing items such as washing machines are not deductible against rental income if they are newly bought for a new property. When it comes to buying replacement items, these can be claimed for, provided they are a ‘like for like’ replacement.
This rule includes furnishings, appliances (including white goods) and kitchen-ware, provided the items are wholly for use by the tenants. If the items represent an improvement, this extra cost should be apportioned. Tax relief can also be claimed for the incidental costs of disposing old items when replacements are acquired.
To summarise, expenses that can be claimed include repairs and maintenance (excluding capital improvements), gas safety certificate costs, legal fees for lease renewals, shorthold tenancies of less than one year, eviction of tenants, management and accountancy fees, insurance premiums for buildings and/or contents
I addition, ground rent (if applicable), rates or council tax paid during void periods, service charges, and wages paid to self-employed contractors (provided they are not provided with tools or materials) or employees (subject to compliance with Employment Regulations).
It is important for landlords to keep accurate records of their expenses and retain receipts as evidence of their expenditure. They should also seek professional advice if they are unsure about any aspect of their tax obligations.