Expenses and allowances Relating to Property
If an investment property is let out, certain expenses and tax allowances can be deducted from the rental income to calculate the taxable profit or loss. When an investor has several UK residential properties let out, the income and expenses should be worked out as a whole, but holiday lets and overseas lets must be considered separately.
The expenses that can be deducted from letting income include:
- Letting agent's fees.
- Legal fees for lets of a year or less.
- Legal fees for renewing a lease for less than 50 years.
- Accountant's fees.
- Buildings and contents insurance.
- Interest on property loans.
- Repairs and maintenance.
- Utility bills such as water, gas and electricity.
- Rent, ground rent and service charges.
- Council Tax.
- Paid for services such as cleaning or gardening.
- Direct costs of letting the property, such as advertising, phone calls and stationery.
Only expenses that are incurred purely in the running of the property letting business can be claimed in full. If an expense is only partly incurred running the business, or if the owner uses the property themselves, it may only be possible to claim part of it. Expenses must also be allocated to the year they apply to - regardless of when the bills are actually paid. Occasionally, part of an expense may be allocated to one year and part to another year.
When the annual rental income is under £15,000 - before expenses are deducted - the total expenses are included on the tax return. If, however, annual rental income is £15,000 or more, a breakdown of expenses must be provided. If the business makes a loss, it can usually be carried forward to a later year and offset against future profits. If it's a UK holiday letting business, the loss can be offset against all other income, not just property income.
When calculating profit, certain expenses cannot be deducted. These include:
- Capital costs such the property itself or furniture.
- Improvements to the property.
- Personal expenses that are not to do with the letting business.
- Any loss made when selling the property.
In addition to expenses, there are some allowances that can be claimed for capital costs, which include expenditure on assets like furniture and machinery. Whatever the type of let, a capital allowance can be claimed on the cost of items needed for running the property letting business, such as cleaning and gardening equipment. The allowance can vary depending on the purchase, but generally speaking, 50 per cent of the cost can be claimed when the item is bought, and each year thereafter a further 25 per cent of the remaining cost can be claimed. The allowances are reduced if the item is used for anything other than the business.
Choose Wear and Tear or Renewals
Other allowances vary according to the type of let. For UK and overseas furnished residential lets, a wear and tear allowance of 10 per cent of the net rent can be claimed. An alternative is to claim a renewals allowance to cover the cost of replacing equipment or furniture. But only one or other of these allowances can be claimed and it is not possible to switch between the two types from year to year.
For UK furnished holiday lets, a capital allowance can be claimed for furniture and equipment provided. Alternatively a renewals allowance can be claimed, but again only one or other can be claimed and it must be stuck to from year to year.