Rental property tax deductions: What can you claim for?
The general rule for claiming any business costs for tax purposes, both for property rental and a business trade, is that the costs must be incurred ‘wholly and exclusively’ for the purposes of the trade. This means that you can generally claim for a business cost if you would not have incurred it if you were not in business. You cannot claim for any expense that was not incurred solely for your property rental business.
You might incur a cost where only part of it is an expense for your property rental business. If a definite part of a cost is incurred wholly and exclusively for the property business then you can deduct that part. At times, a cost can be incurred for both and private use. In this case the private element must not be claimed.
There have been lots of changes in the tax rules for property rental businesses in the last two years. In particular, the cessation of the 10% wear-and-tear allowance for furnished lettings and the restricting on claiming interest at your highest rate of income tax. Companies that own properties with interest costs are not affected.
You can claim for most ‘revenue’ expenses, which include the day-to-day running costs of the property, but you cannot claim for ‘capital’ expenses.
The following is not a comprehensive list. However, it will cover the most popular types of revenue expenditure that you can claim.
Bank and loan interest, but not the capital part of a repayment mortgage. From 6 April 2017, you
may not be able to claim for the interest cost at your highest rate of tax. You can still claim for the interest cost, but only at a maximum of 20%, on a reducing scale over the next few years.
General maintenance and repairs to the property
Water rates and council tax
Rent (if you sublet, ground rents and service charges
Light and heat e.g. gas, electricity & oil
Insurance for buildings, contents and public liability
Advertising for tenants
Letting agent fees and management fees
Accountant’s fees in the preparation of the rental accounts (but not for the Tax Return itself)
Costs of services, including gardeners and cleaners
Non allowable costs
Capital expenses are not allowable and cannot be claimed against your rental income.
The initial purchase of the property and its furnishings and equipment (e.g. beds, carpets, sofa, tables, chairs, washing machine, cooker etc) cannot be claimed as revenue or capital expenses. These items are described as ‘capital’ purchases. You can claim for the replacements or repairs later on.
Repairs will generally improve and increase the value of the property. That does not make them capital costs. A repair restores an asset to its original condition, sometimes by replacing parts of it. Replacing a part of the property with the nearest modern equivalent is still a repair if the improvement is incidental to the repair, such as replacing a single-glazed window with a double-glazed window.
Expenses are generally ‘capital’ expenses if they will be used in the business over a longer period of time, such as when you add something to the property that was not there before or substantially alter, improve or upgrade something that was already in existence. Common additions to the property that are not revenue expenses include installing a security system or replacing a kitchen with one of a much higher specification.
Even substantial costs can be classified as ‘revenue’ repairs costs, if you replace something that was already there. The key test is whether the property could be used for rental purposes without the upgrade/repair taking place. So a major central heating and boiler installation may be deemed as a property repair if it is only replacing an old system. You may be fined for not upgrading and maintaining electric and gas systems. That does not actually stop the property not being used. Therefore, the costs of bring electric and gas systems up to date may still be a repair, as the wiring and pipes existed beforehand. If a newly purchased dilapidated property had a major roof leak then this may be classified as a ‘capital’ cost as the property could not be used in its current state. However, if a major storm caused the same issue then you could claim for the repair as the property had an existing functional roof beforehand. This is a complex area of tax law so advice should be sought.
Up to 5 April 2016 you were able to claim a 10% wear and tear allowance instead of the costs of replacing movable furniture and equipment.
If you travel ‘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 then you can claim the cost of travel from the place you manage the letting, which is often your home, to the rental property and back. If you use your own car then you can claim using HMRC’s mileage allowance at 45 pence per mile.
The usual story that you will hear from HMRC is that you cannot claim capital allowances (tax depreciation) for equipment you buy for use in a residential letting business. That is not completely true. The law says that you cannot claim capital allowances for equipment ‘for use in a dwelling-house’ which means the equipment for use in the property by tenants.
You can claim capital allowances 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 property. You can even include a computer if that is what you use to manage your rental business. However, you must limit your claim proportionately to account for any non-business use.
Furnished holiday lettings are treated as a trade for tax purposes. These lettings have different rules for claiming for furniture and equipment. You can claim capital allowances on the initial purchase of furniture etc on a furnished holiday lettings and also their ultimate replacements on the same basis.