Landlords Claiming Expenses Against Tax
How landlords claim tax expenses?
Landlord tax is one of the most difficult areas that landlords have to get to grips with. After all very few landlords are professional accountants. Therefore for many of us keeping up to date with tax deadlines and understanding fully the taxation system relating to buy-to-let property can be a time consuming and frustrating experience.
Thankfully for landlords working out how they claim their landlord expenses there are people like Steve Sims the author of ‘Understanding and Paying Less Property Tax for Dummies.’ who has set out in very clear and concise way how they can understand their own tax position and claim back their landlord tax expenses. This week Steve turns his attention to how landlords calculate and then claim back the expenses against their tax bill.
Definitive list of landlord tax expenses
If every accountant had a pound for every time a client had asked for the ‘definitive’ list of expenses that a landlord can claim, they would be rich men.
For what it’s worth here’s the answer – there is NO definitive list of tax deductable expenses for a landlords buy-to-let property.
However to help out this is a list of the most common allowable expenses on a rental property.
This is still not a definitive list.
“Wholly and exclusively’ test – claiming tax expenses
Nothing stops any landlord claiming a tax expense that is incurred:
- ‘Wholly and exclusively’ for his rental business providing it is an expense that is not a capital expense
This article assumes that the property incurring the expense is let at a market rent and there are no unusual factors, such as uncommercial letting or sale and leaseback of property.
This information applies to landlords and property investment companies.
First steps in a landlord claiming tax expenses
Every time a landlord spends money on a property, ask yourself: “Is this a capital or revenue expense?”
The rule of thumb is a capital expense is a one-off property expense concerning the:
- Purchase For example, the purchase price and related costs
- Enhancement For example, home improvements like extensions, loft conversions and garages
- Sale of an asset For example, the sale price and related costs
Landlords cannot set off capital expenses against rental income or vice versa.
If a property is undergoing major refurbishment, make sure your receipts are itemised to show capital costs and general repairs.
Record the capital costs on your property register so the information is available for a capital gains tax return when the property is eventually sold.
The general repairs are recorded in your property rental accounts for the tax year and set off against the rent to reduce profits on your rental business.
Landlords claiming revenue tax expenses
Revenue tax expenses are the day-to-day costs of running your rental business.
They generally fall in to two categories:
- Property costs – like the mortgage interest, rates and repairs
- Business costs – the administrative costs of your property business, like phone bills, stationery, and postage.
These tax espenses are recorded in the rental accounts.
The ‘wholly and exclusively’ test – claiming tax expenses
Once you have decided an expense is a revenue expense, you must apply the ‘wholly and exclusively’ test.
This rule says that expenses cannot be deducted unless they are incurred wholly and exclusively for business purposes.
Tax inspectors will want to see documentary proof of contentious expenses – like documents, agreements, notes of meetings and any other records – so make sure you keep detailed and organised records to prove your expenses.
The taxman will listen to what you say about why you are claiming an item as a business expense, but will look at disproving what you say with documentary evidence.
For example, a property owner lives in London and also owns a cottage in Cornwall. The cost of travelling to Cornwall for a family holiday will fail the ‘wholly and exclusively’ test even if the property owner says the visit was to inspect and prepare for a letting.
This is called a ‘dual purpose’ tax expense
Dual-purpose tax expenditure
If an expense is not ‘wholly and exclusively’ for the rental business, then strictly, it should not go in the accounts.
In practice, some dual-purpose expenses include an obvious part spent for the purposes of the rental business.
Tax inspectors are told to allow a proportion of dual-purpose expenses that are ‘apportioned’
When expenses may be apportioned HMRC guidance for tax inspectors says they may allow a proportion of an expense when a definite part or proportion of it is wholly and exclusively for the purposes of the rental business.
Where a definite part or proportion of an expense is ‘wholly and exclusively’ incurred for the purposes of the business, that part or proportion can be deducted.
An example is the revenue running costs (including standing charges and hire-purchase interest) of a car or van used partly for business and partly for private purposes. If 20% of the car mileage is business mileage, deduct 20% of the running costs of the car, including standing charges.
Landlords should keep a business mileage log for each trip, recording:
- The date of the journey
- The start and end point
- The business reason for the trip
- The miles travelled.
For belt and braces, take a photo of the car mileage on April 6 and the following April 5.
Another example of apportioning running costs is using part of your home as an office for your rental business.
How to apportion a landlord’s tax expenses
Some other rental business expenses that need apportioning are those paid in one tax year that apply to more than one tax year.
For instance, a £350 home insurance bill may be paid annually on 1 January for the period 1 January 2008 until 31 December 2008.
You should decide how you would apportion expenses – by days or months and apply the formula consistently.
Here’s how our insurance bill is apportioned –
Take the £350 bill and divide by the number of days in the year (Don’t forget leap years have an extra day)
350/365 x 95 days (1 January – 5 April) = £91.10 for the 20017-018 tax year
350/365 x 270 days (6 April – 31 December) = £258.90 for the 20018-019 tax year
Take the £350 bill and divide by the number of months in the year
350/12 x 3 months (January – March) = £87.50 for the 20017-018 tax year
350/12 x 9 days (April – December) = £262.50 for the 20018-019 tax year
It’s OK to ignore the odd five days at the end of the tax year when apportioning by months.
Allocating landlord tax expenses
To keep accurate accounts, landlords need to know important financial information, like how much the rental business owes you, which are your best and worst performing rental properties and how to graph trends.
To do this, landlords need to allocate expenses to
- To tax years
- To people
- To rental property
Once you have this information, you can use the data to make sensible and informed business decisions based on fact rather than emotion.
Landlord Tax Legislation
Income tax cases for 2005-06 onwards Section 272(1) Income Tax (Taxation of Other Income) Act 2005 says that the profits of a property business are to be computed in the same way as the profits of a trade.
The trading income rules in Part 2 of Income Tax (Taxation of Other Income) Act 2005 that apply for the purposes of computing the profits of a rental business are set out in S272 (2) Income Tax (Taxation of Other Income) Act 2005.
Landlords – remember you can calculate your tax online for FREE using our FREE landlord software the Property Manager.