When it comes to doing your tax return at the end of the year, you, as a landlord, will potentially be unsure on which of the expenses you have paid for your rental property can actually be expensed on your return. You may be surprised to hear that there are strict regulations for the items and bills you can add to your expenses, and the ones you cannot. In this article, we wanted to share some of the items you can and cannot expense as a landlord, as well as the way in which HMRC will view your income and outgoings as a landlord.
When you are renting a property in the UK, all the income that is generated from letting out your property must be on your yearly tax return. It’s as simple as that! So if you are using your accountant to do your return, ensure you send every invoice you or your managing agent sends to your tenants to prove the income generated from the monthly rent they are paying. If you are using a managing agent, they will often send these to you with the explanation of their fees included, which will help show one of the expenses you have incurred for your rental property.If you and your partner own the property together, the income must be split according to the percentage of the property ownership between you, for example, if it is jointly owned, then the income split must be 50:50, and each person must declare the income. If it is owned unequally, then you must fill in a form from HMRC to help prove the split. Please note, if you rent more than one property, you must add all of your income from them and the expenses for them together, and treat the properties as single businesses. These tips are for landlords who have properties based in the UK and are private individuals.
The government are looking at ways to make the tax system fairer, and one of these changes that will gradually be coming to the system is the introduction of restriction of financial tax relief for individual landlords - financial tax relief includes mortgage interest, interest on loans to buy furnishings, and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan.This works to ensure landlords with higher incomes will no longer receive the most generous tax treatment, and they proposed this to change gradually from April 2017 over 4 years. These changes are as follows:
No more can you have the tax relief from your mortgage interest and a 10% wear and tear allowance, these have been scrapped from the relief landlords receive in the UK from April 2016. However, you can receive tax breaks from other items, as long as they are expenses which are wholly and exclusively for the purpose of the property which is being let, this includes:
As a landlord, the above may seem simple (well, sort of!) but it gets more difficult when understanding the items we cannot expense. Items must pass the “Capital Expenditure Test” to prove they are appropriate items for tax relief. The Capital Expenditure Test is where spending creates an asset of enduring benefit to the landlord, such as improving or upgrading something which was pre-existing; installing a security system or carbon monoxide detector; or central heating which was not there before will fall under this expenditure. The cost of a new kitchen or bathroom which is an improvement over the previous one will also be deemed an asset which can improve the value of the property. If you improve the property by adding an extension, or other improvements which will help with the sale of the property will be deducted from your capital gains when you decide to sell the property.In short – if you spend money on improving your rental property which, ultimately, will help you sell it or rent it at a higher income, you will not be able to claim tax relief on any/all of the costs. The only way you can claim tax relief on “improvements” is if they are like for like upgrades – so a similar standard, size and layout to the previous one. If you must replace a toilet which is broken, then you must replace it with a toilet which is a similar cost and standard as the previous one, as this can be expensed as a repair. However, if you decide to tile an entire bathroom which only previously had half tiles, it would be deemed a capital expenditure as the tiles were not there before.See how this can become pretty confusing?As a landlord, you need to consider that installing anything to your rental property which was not there originally will be deemed capital expenditure, whereas replacing a broken item with a like-for-like piece will be seen as a repair which you can claim.This takes us onto repairs and maintenance, and replacement of domestic items – which can be expensed within your tax return. HMRC defines “repairs” as work which restores an asset to its original condition, whether this repairs or replaces parts of it. Repairs and maintenance can apply to items within the property, or to the property itself such as the roof or rendering, again, there must be a like-for-like basis and not any which are covered by insurance. You can also claim to repaint the property, replacing a broken boiler, and cleaning carpets.Where our new landlord clients can become confused is when it comes to replacement of domestic items. Although you cannot claim for purchasing new furniture when you originally purchase the rental property, you can claim to replace “domestic” items for like for like furniture which fall into these four categories:
You can only claim the cost of the item to you (through proof of receipts and invoices) and the old item must not be available for use within the property. The replacement must be of a similar standard or value, and if you choose to replace an item which is more expensive than the original, you cannot claim the extra cost the new item was vs one to the same standard.When you decide to become a landlord, you must consider that, generally, the costs of getting the property ready for rental will not be taxable expenses, as these will generally be classed as capital expenditure, as HMRC states “an item purchased for the first time does not qualify for any relief” – this includes carpets, furniture, appliances, updating the property etc.The money you spend getting a property into the right state for the rental will be reflected (hopefully) in the price you paid to purchase the property. If you managed to purchase a place which is in need of a lot of work, you will often find this is reflected in the purchase price, so HMRC does not give you relief for updating the property to a better state, as this will be viewed as helping to increase the value of the property, and thus, falls into capital expenditure.If you are considering purchasing a property to rent out or to rent out your own home as you are moving to a new property, we hope this article has helped you to understand where you can and cannot claim tax relief. If you require any assistance or support with your returns from a supportive and knowledgeable accountant, we recommend you do some research and as your potential accountant questions in regards to what can and cannot be claimed, to ensure they fully understand and can assist you in your journey to becoming a landlord!
