Broadly speaking, in calculating rental profits a taxpayer can deduct business expenses so long as they are:
- incurred wholly and exclusively for business (rental) purposes; and
- are not of a capital nature.
It is not possible to set out all the expenses that are allowable for tax purposes in all circumstances but some idea of the main types of expenses that are likely to arise in a rental business and also some idea of what can or cannot usually be claimed as a deduction in calculating rental business profits are covered in this post.
For an expense to qualify the business purpose must be the sole purpose. A non-business or private purpose prevents any deduction from business profits where there is no objective yardstick by which any business element can be distinguished from the non-business element.
Examples of deductible expenses include:
- Repairs and maintenance;
- Interest paid;
- Capital allowances;
- Wear and tear or renewals allowance;
- Travelling expenses;
- Legal and professional fees;
- Managing agent’s fees;
- Rents and ground rents paid;
- Lighting, heating, cleaning, gardening, security, caretaking etc.;
- Accountancy fees for preparing the accounts and agreeing taxation liabilities;
- Council tax, business rates and water rates – if paid by the landlord;
- Bad debts and the cost of pursuing debts;
- Staff costs, including statutory redundancy pay and training.
Repairs and maintenance
- Expenditure on repairs is deductible, including ordinary repairs and decorating before the building is first let;
- Expenditure is not deductible for the cost of alterations and improvements, or the cost of bringing a newly bought building into a fit state for letting. These are capital expenses;
- Expenditure reimbursed by insurance is not deductible.
Interest payable for the purpose of the property letting business can be deducted in the accounts. This includes interest on a loan to buy or improve the property or to fund repairs.
- Travelling expenses are allowed if they satisfy the ‘wholly and exclusively’ rule. For example, the costs of travelling, solely for the purpose of the business, are allowed between let properties, or to a let property from the place where the rental business is administered;
- Travelling expenses are not allowed if private purposes are included in the travel, such as personal shopping or family visits;
- Where the business is administered from the landlord’s home, the cost of travelling from there to the properties is unlikely to be allowed if the home is far away from the properties, as the need for the journey is considered to be dictated by the personal preference of the landlord to live in a particular place, rather than the needs of the property business.
Legal and professional fees
- Fees on the purchase of a property or for the first letting agreement are treated as capital expenses and are not tax-deductible, if they are for a period of more than a year;
- Fees for a letting agreement of less than a year, or for renewing a lease for less than 50 years, are deductible;
- Other professional fees, which are normally allowed, are those for insurance valuations, and for evicting an unsatisfactory tenant in order to re-let the property.
Income from property is affected by a large number of tax rules – the reasons for this are the variety of uses to which property can be put, and the different ways in which income and profits arising from property can be taxed. Substantial profits can be made on single transactions, making tax planning important. The large volume of tax legislation affecting property means that the precise way in which a transaction is structured can significantly affect the tax payable.