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Business Tax  •  Personal tax  •  Property  •  Tax Planning  •  Tax Relief  •  Taxation

Clarifying allowable expenses BTL landlords can claim against income

By RJP LLP on 24 May 2017

Updated: 11th September 2019

Tax relief opportunities for buy to let (BTL) landlords are getting increasingly scarce these days. The old wear and tear allowance was removed over two years ago, but it is still possible for landlords to claim expenses incurred for properties and offset them against rental income. The rules are frequently amended and to avoid expenditure that cannot be reclaimed, here is a handy list of what expenses you can claim for on a buy to let property. This article also includes up to date guidelines to ensure you can stay on the right side of HMRC, and easy to understand worked examples.

 

What HMRC rental property expenses are allowable on a buy to let property?

Allowable expenses are usually of a revenue rather than a capital nature and they must always have been incurred wholly and exclusively for the purpose of the letting. The list below outlines what expenses are allowed, potentially with an adjustment for private use.

Allowable costs include:

  • Business rates or council tax;
  • Rent paid to a superior landlord;
  • Insurance;
  • Management expenses;
  • Advertising for tenants;
  • Maintenance;
  • Repairs such as:
  • Repairing water leakages, gas leaks, burst pipes, electrical problems;
  • Replacing/repairing broken windows, doors, gutters, roof slates and tiles;
  • Repairing internal or external walls, roofs and doors;
  • Repainting and decorating to maintain the original (this does not include any property improvements);
  • Treating damp or rot problems, repointing and stone cleaning;
  • Hiring specialist equipment to carry out necessary repair work;
  • Replacing (to a similar standard) existing fixtures and fittings, e.g. radiators, boilers, water tanks, bathroom suites and kitchens (but not any electrical appliances), which have been damaged as a result of the problems requiring repair works. Replacing single glazing with double glazing will qualify here;
  • Cost of professional insurance to cover maintenance repairs.

Example of an acceptable buy to let expenses claim

Malcolm is a property investor. He uses a plumber to repair the damage caused by an upstairs radiator leak, due to a faulty valve in one of his rental properties. He can expense the cost of all the repairs needed including new radiator valves and all the redecorating needed to make good damage to ceilings and flooring below. With regard to the flooring, he can only claim the full cost of repairing the existing floor to the same standard as was previously in place.

 

Is it possible to claim tax relief on buy to let finance costs?

Finance costs can still be offset against rental income on a property, but the amount of tax relief has been significantly restricted.

It remains possible to claim for advisory fees and interest payable on a loan taken out to buy the property initially, or to undertake repairs, improvements or alterations, provided the costs are incurred wholly and exclusively for the property rental business. A deduction is also available where the mortgage is secured on other property. From 6 April 2020, the amount of tax relief available for the biggest financial cost – namely mortgage interest tax relief – has been restricted to the basic rate of tax. This is irrespective of the taxpayer’s marginal rate of tax.

 

Example of how to claim tax relief on buy to let finance costs

Sheila buys a rental property for £250,000 with a £200,000 buy to let mortgage and rents it out. After a couple of years, she borrows a further £50,000, secured on her personal property, to undertake improvements to the rental property. The lending fees she incurs in securing the additional loan is fully tax deductible as a professional services expense associated with the property. The loan interest is currently partly tax deductible to a maximum of 25% for the current 2019-2020 tax year and the remaining 75% of loan cost can be reclaimed through a 20% tax credit. From April 2020. Sheila will only be able to reclaim back the costs of the loan equivalent to the basic rate of tax (offered as a 20% tax credit).

Note however, that this applies where a property is owned personally by the taxpayer. If it is owned through a limited company, is a commercial property, or offered as a furnished holiday let, all the mortgage interest costs are tax deductible. For this reason, many landlords have opted to own property through a company structure, although this has its own set of pros and cons.

 

Understanding terminology: What does ‘wholly and exclusively’ mean?

Wholly and exclusively is a term that buy to let investors will encounter frequently and it means an expense or an asset is to be incurred or used only in connection to the property itself and not for personal use.  Property landlords remain able to deduct allowable expenses incurred in relation to their rental property business from rental income, provided it can be demonstrated that these expenses have been incurred ‘wholly and exclusively’ for the property rental business.  Any other expenses cannot be offset against rental income.

Example of how ‘wholly and exclusively’ rules are applied to buy to let property

George has several rental properties and a main residence. The houses he owns all need repainting on the outside and he hires a handyman to re-do the exteriors. He buys all the paint and gets some extra to cover his own property took although he pays the handyman separately for that job.  Clearly, this does not meet the ‘wholly and exclusively’ condition because he is benefiting personally from the paint purchase. He would need to adjust his claim to remove the cost of paint for his home. Better still would be buying the paint separately, so that he has one receipt just for his rental property accounts.

 

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.

 

Example of how tax relief can be claimed on capital expenses

Malcolm needs to replace the existing washing machine in his property because tenants have complained it does not work efficiently. He buys an equivalent model for £250 online and has it delivered to the property. He also has to pay £30 to have the old one taken away. The total cost of £280 can be claimed as an expense. If there was not already a washing machine installed, he would not be eligible to claim.

Alternatively, rather than buy a new washing machine, Malcolm’s tenants have asked him to provide a washer dryer instead and he might agree as a goodwill gesture. The new item, which costs £850, is delivered and it also costs £30 to remove the old item. Since this is not a like for like replacement, the full amount cannot be claimed as an expense and Malcolm can only claim relief for the first £280.

Any improvement expenditure, for example building an extension or installing central heating, is not allowable against rental income, but can instead be offset for capital gains tax purposes when the property is sold.

 

How is profit and loss calculated when multiple properties are owned?

If a landlord owns multiple UK rental properties, this is treated as one rental property business with all income and expenditure being amalgamated into one profit and loss account. Any net losses can be carried forward to offset against profits of the same property rental business.

Note that overseas properties should not be amalgamated with UK properties for this purpose.

Find out more: partners@rjp.co.uk

 

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Updated: 11th September 2019

Tax relief opportunities for buy to let (BTL) landlords are getting increasingly scarce these days. The old wear and tear allowance was removed over two years ago, but it is still possible for landlords to claim expenses incurred for properties and offset them against rental income. The rules are frequently amended and to avoid expenditure that cannot be reclaimed, here is a handy list of what expenses you can claim for on a buy to let property. This article also includes up to date guidelines to ensure you can stay on the right side of HMRC, and easy to understand worked examples.

 

What HMRC rental property expenses are allowable on a buy to let property?

Allowable expenses are usually of a revenue rather than a capital nature and they must always have been incurred wholly and exclusively for the purpose of the letting. The list below outlines what expenses are allowed, potentially with an adjustment for private use.

Allowable costs include:

  • Business rates or council tax;
  • Rent paid to a superior landlord;
  • Insurance;
  • Management expenses;
  • Advertising for tenants;
  • Maintenance;
  • Repairs such as:
  • Repairing water leakages, gas leaks, burst pipes, electrical problems;
  • Replacing/repairing broken windows, doors, gutters, roof slates and tiles;
  • Repairing internal or external walls, roofs and doors;
  • Repainting and decorating to maintain the original (this does not include any property improvements);
  • Treating damp or rot problems, repointing and stone cleaning;
  • Hiring specialist equipment to carry out necessary repair work;
  • Replacing (to a similar standard) existing fixtures and fittings, e.g. radiators, boilers, water tanks, bathroom suites and kitchens (but not any electrical appliances), which have been damaged as a result of the problems requiring repair works. Replacing single glazing with double glazing will qualify here;
  • Cost of professional insurance to cover maintenance repairs.

Example of an acceptable buy to let expenses claim

Malcolm is a property investor. He uses a plumber to repair the damage caused by an upstairs radiator leak, due to a faulty valve in one of his rental properties. He can expense the cost of all the repairs needed including new radiator valves and all the redecorating needed to make good damage to ceilings and flooring below. With regard to the flooring, he can only claim the full cost of repairing the existing floor to the same standard as was previously in place.

 

Is it possible to claim tax relief on buy to let finance costs?

Finance costs can still be offset against rental income on a property, but the amount of tax relief has been significantly restricted.

It remains possible to claim for advisory fees and interest payable on a loan taken out to buy the property initially, or to undertake repairs, improvements or alterations, provided the costs are incurred wholly and exclusively for the property rental business. A deduction is also available where the mortgage is secured on other property. From 6 April 2020, the amount of tax relief available for the biggest financial cost – namely mortgage interest tax relief – has been restricted to the basic rate of tax. This is irrespective of the taxpayer’s marginal rate of tax.

 

Example of how to claim tax relief on buy to let finance costs

Sheila buys a rental property for £250,000 with a £200,000 buy to let mortgage and rents it out. After a couple of years, she borrows a further £50,000, secured on her personal property, to undertake improvements to the rental property. The lending fees she incurs in securing the additional loan is fully tax deductible as a professional services expense associated with the property. The loan interest is currently partly tax deductible to a maximum of 25% for the current 2019-2020 tax year and the remaining 75% of loan cost can be reclaimed through a 20% tax credit. From April 2020. Sheila will only be able to reclaim back the costs of the loan equivalent to the basic rate of tax (offered as a 20% tax credit).

Note however, that this applies where a property is owned personally by the taxpayer. If it is owned through a limited company, is a commercial property, or offered as a furnished holiday let, all the mortgage interest costs are tax deductible. For this reason, many landlords have opted to own property through a company structure, although this has its own set of pros and cons.

 

Understanding terminology: What does ‘wholly and exclusively’ mean?

Wholly and exclusively is a term that buy to let investors will encounter frequently and it means an expense or an asset is to be incurred or used only in connection to the property itself and not for personal use.  Property landlords remain able to deduct allowable expenses incurred in relation to their rental property business from rental income, provided it can be demonstrated that these expenses have been incurred ‘wholly and exclusively’ for the property rental business.  Any other expenses cannot be offset against rental income.

Example of how ‘wholly and exclusively’ rules are applied to buy to let property

George has several rental properties and a main residence. The houses he owns all need repainting on the outside and he hires a handyman to re-do the exteriors. He buys all the paint and gets some extra to cover his own property took although he pays the handyman separately for that job.  Clearly, this does not meet the ‘wholly and exclusively’ condition because he is benefiting personally from the paint purchase. He would need to adjust his claim to remove the cost of paint for his home. Better still would be buying the paint separately, so that he has one receipt just for his rental property accounts.

 

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.

 

Example of how tax relief can be claimed on capital expenses

Malcolm needs to replace the existing washing machine in his property because tenants have complained it does not work efficiently. He buys an equivalent model for £250 online and has it delivered to the property. He also has to pay £30 to have the old one taken away. The total cost of £280 can be claimed as an expense. If there was not already a washing machine installed, he would not be eligible to claim.

Alternatively, rather than buy a new washing machine, Malcolm’s tenants have asked him to provide a washer dryer instead and he might agree as a goodwill gesture. The new item, which costs £850, is delivered and it also costs £30 to remove the old item. Since this is not a like for like replacement, the full amount cannot be claimed as an expense and Malcolm can only claim relief for the first £280.

Any improvement expenditure, for example building an extension or installing central heating, is not allowable against rental income, but can instead be offset for capital gains tax purposes when the property is sold.

 

How is profit and loss calculated when multiple properties are owned?

If a landlord owns multiple UK rental properties, this is treated as one rental property business with all income and expenditure being amalgamated into one profit and loss account. Any net losses can be carried forward to offset against profits of the same property rental business.

Note that overseas properties should not be amalgamated with UK properties for this purpose.

Find out more: partners@rjp.co.uk