Allowable expenses on a rental property
What are my allowable expenses?
I’ve been contacted recently by several landlords who were enquiring whether some of their recent building works on their rental property were an allowable revenue expense for their rental business. There appears to be a lot of confusion amongst landlords about what they can or can’t off-set against their rental income. We’ve written before about the sorts of expenses that landlords can deduct and how to avoid tax on rental income.
As part of my research I unearthed a really useful publication, the HMRC Property Rental Toolkit . It should answer many landlords questions. On pages 6-7 there is a very useful checklist, which landlords can use to work through their tax calculations to ensure they don’t miss anything in their tax calculations.
Remember landlords can use our free property management software to calculate their tax liability.
Revenue versus Capital
Any allowable expense should be ‘wholly or exclusively’ incurred as part of a landlords rental business. It will end up being classified as either a revenue or a capital cost. We’ve included articles before about how to distinguish whether an expense is wholly or exclusively’ incurred as part of a rental business.
If the expense is a revenue expense, a landlord will be potentially liable to off-set it against any rental income, thereby reducing rental profits and income tax liabilities. Any capital costs will be included in your base costs and will be used to calculate what capital gains tax should be paid.
Repairs Versus Improvement of Rental Property
One of the main questions landlords get confused about is whether the expenditure is a repair or an improvement. A repair is a revenue expense and can be off set against your rental revenue. If the work is an improvement it becomes a capital cost and will only come into play if a landlord sells their rental property.
An example of a repair would be the replacement of a slate roof. This would be allowable against a landlords revenue costs. If the costs related to a completely new roof, say as a result of an extension to the property – this would be considered to be an improvement to the property. As such the costs would then have to be added to a landlord’s base costs. These would then be taken into account if the landlords disposed of the property, and would be incorporated into the calculation of any capital gains.
Apportionment of Rental Income
Where it get’s slightly more complicated is where there are elements of repair and new in the same project. This happens quite a lot when it comes to refurbishment of a property. In simple terms if we take the roof example again. If a landlord decided to renew their slate roof at the same time as they were adding in a side extension doubling the roof area then how would they need to assess their tax liability for these works? This is where the concept of apportionment comes in. In this scenario you would need to have a cost for both the repair and new build elements. The repair or replacement of the roof would count as a revenue cost. The new build costs would be added to the overall base cost of your property and would be assessed if your property was sold and taken into account in the capital gains calculation.
The revenue helpfully give examples in their Toolkit of typical repairs undertaken by a landlord in their rental property. These include:
• exterior and interior painting and decorating
• stone cleaning
• damp and rot treatment
• mending broken windows, doors, furniture and machines such as cookers or lifts
• replacing roof slates, flashing and gutters
For more details of how to account for general deductions and repairs have a look at the HMRC specific guidance manual pim2020
Another complication can occur with the effluxion of time where technology and building technology improves. For example until recently the replacement of UPVC double glazing was seen as an improvement over single glazed wooden units. This is no longer the case. Have a look at this guidance note from HMRC on how to differentiate between a repair and improvement.
Taxation of Rental Business – ‘grey areas’
There are many grey areas of taxation for a landlord to navigate. If landlords need a second opinion why not post your questions to our landlord forum.
Landlords need to often take a view on whether it’s likely to be disputed that the new flooring or bathroom suite installed in their rental property would be picked up by the slightly overstretched HMRC as an improvement to their rental property or will just sail through their self assessment return as another repair expense.
What landlords always need to do is to have a well prepared and evidenced approach based on the latest taxation guidance. Then at least they will stand a sporting chance of winning their argument if HMRC were ever to dispute their case.