This is easier to do than minimising rental income. This is because the Inland Revenue grants certain allowances based on certain definitions as well as allowable expenditure. This means expenditure and allowances can be deducted from the taxable rental income to derive the taxable profit. The two pure definitions that you need to remember for allowable expenditure and taxable allowances, as stated by the Inland Revenue, are:
1. Any costs you incur for the sole purposes of earning business profits'
2. Capital allowances on the cost of buying a capital asset, or a wear and tear allowance for furnished lettings'
1. Any costs you incur for the sole purposes of earning business profits'
Any expense you incur wholly, necessarily and exclusively' for the business is fully deductible from your rental income. Any personal expenditure that you make that relates to the business is partly tax deductible from your income.
Please find below our list of fully tax deductible expenses:
Expense |
Description
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Repairs & maintenance |
All repairs and maintenance costs are fully tax deductible. Where the property has been altered extensively so as to deem the property being reconstructed, the property is then considered to be modified rather than repaired; hence no amount of the expense is allowed. The only amount allowed would be the estimated cost of maintenance or repair made unnecessary by the modification. Examples of repairs and maintenance expenditure that are fully tax deductible are:
Painting and decoration
Camp treatment
Roof repairs
Repairs to goods supplied with the property i.e. washing machine
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Finance charges |
Any interest you pay on a loan that you took out to acquire a property is fully tax deductible. It is only the interest and not the capital repayment part that is tax deductible. If any of the finance raised (the loan) is used for personal use, such as a holiday, then the interest paid on the amount paid for the holiday is not tax deductible.
The typical interest payments that are allowed are:
Interest on the mortgage taken out to get the property
Interest on any secured or unsecured loans taken out to get the property
Arrangement fees charged by a lender are also tax deductible.
Interest paid on the car you use to run the property business is partly tax deductible - see future newsletters. |
Legal & professional fees |
Allowable expenditures are:
- Letting agent's fees for the collection in rent including the VAT (unless you are VAT registered)
- Legal fees for evicting tenants
- Accountancy fees for preparing your accounts
Disallowable expenditure is:
- Surveyor fees initially paid out to value the property (unless the survey was unsuccessful and you never acquired the property, in which case it is a fully deductible expense)
- Legal fees incurred due to the purchase of the property
These expenses are added to the purchase price. When it comes to calculating the capital gain when you sell the property:
Gain = selling price - purchase price
This results in the purchase price being higher than the actual price paid due to the addition of initial professional fees. So the taxable gain is lower. These fees are subject to full indexation, as is the purchase price, to allow for price inflation. So you do get some tax relief but only further down the line, when you sell the property.
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Council Tax, electricity, water & gas |
If you are renting out all the rooms then all the usual running costs involved with a property are fully tax deductible. This assumes that none of the tenants make a contribution to the bills. If you let out your property inclusive of all the bills then you can fully charge all the bills you include with the rent. If you let out your property exclusive of all bills (which is the usual way) then you cannot claim. Remember, you can only claim the expense if you actually paid it!
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Insurances |
- Buildings insurance
- Contents insurance
- Rental guarantee insurance
The above are fully tax deductible. Life assurance premiums are not as this is personal expenditure. Car insurance is, but only partly - see below.
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Advertising |
Any advertising costs in connection with finding a tenant or selling your property are fully tax deductible. This includes:
- Newspaper adverts
- Agent's commission
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Ground rent |
This is the rent you pay if you own a lease-hold flat, typically a nominal amount of £50 per annum.
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Service charges |
Service charges are incurred if you own a lease-hold flat. If you pay these charges then they are fully tax deductible.
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Letting agent fees |
Any fee that is charged by a letting agent is fully tax deductible, apart from any fees charged for leases created for longer than a year. If a fee is charged for creating a 5-year lease then only one fifth of the fee can be charged for each year.
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Stationery |
Any stationery costs incurred in connection with running your property business are fully tax deductible. This will include items such as:
- All paper and envelopes
- Postage
- All printing expenditure
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2 Capital allowances on the cost of buying a capital asset, or a wear and tear allowance for furnished lettings'
If you are offering a fully furnished property then it may be tax beneficial to use the 10% wear and tear allowance.
This is because you can start to claim the relief as soon as you start to receive income from the property.
If you have purchased a property in the last twelve months and have fully furnished it then you MUST consider the costs incurred for furnishing the property.
If the cost was high, then it may be better to start using the 10% wear and tear allowance.
This is because:
· You will be providing high-quality furnishings and will not expect to replace them for a good few years, i.e., 5-7 years.
Therefore by claiming the 10% wear and tear allowance you will be able to start claiming the relief immediately. This means that up to 10% of your rental income will be deducted
If you do not claim the allowance then you will be using the ‘renewals’ basis method, which will not be used until you replace the furnishings. So, for example if you spend £7,500 furnishing a brand new property before you let it then none of this cost can be offset against your income until it is replaced, which could be 5-7 years in the future.
- If you decide to sell the property before you renew the furnishings, then by using the 'renewal basis,' you will not have managed to offset any renewals cost at all against your property.
This means that you will have incurred unnecessary taxes!
However, if you use the '10% wear and tear allowance,' then you can claim this from the date you purchased the property.
Also, if you have purchased a property that includes furniture and furnishings then again it will be beneficial to claim the allowance.
For further help or guidance on property or any aspect of taxation please do not hesitate to contact Nicholas Charles on 020 7263 3295 or email him on ncharles@charlesfcca.com
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