In 2021 Mr. Doug purchased two estates from his inheritance money. He initially planned to renovate them and rent them out. If his plan worked out, he wanted to expand this business by purchasing more properties so that this would lead to retirement income. He spent a lot of time and money renovating, repairing, fixing, gardening, etc. Although he read HMRC’s guidelines, he couldn’t understand the exact tax deductions that applied to him.
The first thing that Mr. Doug should do is figure out the expenses that qualify as capital and those that don’t. This would help him establish if a tax deduction could be claimed against the income generated from letting, capital gains, or at times, not at all.Trap 1. The initial expenditure of supplying furnishings and equipment for tenants for a rental property is not a tax-deductible expenditure. Although, a deduction is applicable for the expenses of replacement of units in the future.Tip. A tip to avoid Trap 1 is to rent out the estate with the fittings and items you acquired when you purchased it (have a sale/purchase item list with you). They tend to be very cheap. That way instead of spending money on replacing them, you are getting an entitlement for a tax deduction on them.
According to HMRC, the expenses of changing boilers, water, and light fittings, etc. come under renovations to the building and hence the price of changing them is typically tax-deductible from the income generated by letting.
Expenses Mr. Doug incurred on renovation or replacing the structure of the estate, for example breaking walls, converting lofts, do not come under tax deductible changes. Rather, it can be subtracted when figuring out capital gain or loss when the estate is sold, keeping in mind that the improvement is still present at the time of the sale.
Typically, the price of changes and renovation is tax-deductible from rental income. But, HMRC may think differently.Trap 2. HMRC may bring up the point that the cost of changes and renovation that’s so high it constitutes a change required to make the property suitable for renting, is not tax-deductible from income generated from letting. Regardless, it states that the exact rules for structural improvements are applicable.Tip. If a cost captured by Trap 2 is subjective, typically, HMRC would accept changes and renovation expenses incurred before renting begins as tax deductible from rental income and I suggest claiming them as such.All costs aside from the one on furnishings and items for use by the tenant qualify for tax relief. Typically, costs on changes and renovations are tax-deductible from income generated from letting while that for structural improvements is deductible when figuring out capital gains or losses when the property is put on sale.
