We are frequently asked questions, by buy to let residential landlords, about expenses they can claim against their rental income from buy to let properties. The objective of this blog is to help you on the tricky area of deductible rental expenses.
Expenses that can be categorised as incurred wholly and exclusively for the purpose of your rental business are allowable deductible expenses against your rental income. These expenses are called revenue expenditure. In plain English “wholly and exclusively” in this context means that the expense was incurred for the sole purpose of your rental business. If there is any personal gain, it should be incidental.
Below are examples of expenses that are likely to have incurred wholly and exclusively for the purpose of the business and therefore allowable.
- Solicitors fees to evict tenants in order for you to relet the property.
- Repairs to the property
- Letting agent fees
- Accountant’s fees
- Advertising costs
For expenses to qualify as revenue cost (tax deductible), it should have only incurred for the sole purpose of your rental business.
Where you have incurred expenses that have a dual purpose, in other words, the expense has a private and business purpose, the whole of the expenditure will be disallowable unless the business expense portion of the expense is clearly identifiable.
Capital expenditure is NOT deductible against your rental income. The cost of your rental property is a capital expenditure and is not deductible against your rental income.
Also, the expenditure incurred in improving the rental property are not deductible expenses. Though the question of whether your expenditure on rental property is an improvement (capital expenditure) or expenses is mainly a question of fact and degree.
The cost of new loft insulation would be categorised as an improvement and as a result would be treated as a capital expenditure. It would not be an allowable deduction against your rental income.
The cost of a new boiler is an allowable expense, even though it is more efficient compared to the old boiler. This is because any improvements were as a result of changes in technology. Taxman accepts this as a replacing like for like.
Where you have purchased a buy to let property, that is not in a fit state for lettings, until repairs are undertaken, the repairs costs are likely to be classed as capital expenditure and therefore not allowable as a deduction from your rental income.
Tax relief is available on the interest on your buy to let residential property.
From 2017/18, only part of the interest is allowed as a deduction from your rental income, to calculate your taxable income. The balance of the interest is eligible for basic rate relief. The relief is given as a reduction in your income tax bill.
Please note, the reducing levels of interest allowed as a deduction from your rental income.
Tax Year Interest Allowed
Replacement of Domestic Items Relief
If you have let a furnished property, you can claim the cost of replacing domestic items used in the property.
Domestic items include furniture, furnishings, appliances, and kitchenware. It does NOT include fixtures where a replacement is treated as a repair.
Examples of items under Replacement of Domestic Items Relief include replacement of carpets and curtains.
When you buy the domestic item for the first time (not a replacement), tax relief will not be available.
Where you buy a replacement item that is not substantially the same as an old item since there an element of an improvement, your tax relief will be limited to the cost of an item that would be considered substantially similar.
If you would like any further information, please contact Southside Accountants in Wimbledon.
Written by Aziz Merchant FCCA