What Property Expenses Can I claim ?
As Manchestertaxaccountants, we trust this article will define how expenses can be claimed and how this act affects taxpayers with rental income. Please call Salford Chartered Accountants Tel; 0161-278-2714 – if you wish to discuss any points raised in this article. Salford Chartered Accountants are experts in the field of land and property taxation.
An individual’s income from property is subject to charges to income tax in accordance with the rules of the Income Tax Trading And Other Income Act 2005.
Income Tax Trading And Other Income Act 2005 or ITTOI 2005 states that property income is charged on the profits of a property business. This statute also states that a UK Property business which is carried on for generating income from land which is situated in the UK and that “generating from land “means in law “exploiting an estate, interest or right in or over the land as a source of rents or other receipts”.
This is a broad definition but, in practice, the main classes of property income are rents, lease premiums under 50 years, rights of way, sporting rights and income from the letting of fixed caravans or permanently moored houseboats. In this article we shall concentrate mainly on the renting of domestic and commercial land and property.
The golden rule for reclaiming expense on property rentals is the expenditure incurred “wholly and exclusively and necessarily for the purpose of the trading “. HMRC invariably lives by this tax ruling and will sight it and judge expenditure in most tax compliance visits, enquiries or tax investigations by this ruling. That is the whole point of any tax investigation, it is in place to ensure that the taxpayer is complying with tax law and claiming the right amount of expenditure and declaring the correct amount of income.
What does this ruling mean?
- Has the expense been wholly made for the business expenditure? Was the expense purchased for the trade of renting the property. HMRC compliance department will investigate each expense and judge was this expense wholly for the business or could it be disallowed and wholly not necessary.
- Was this purchase exclusively for property rental expenditure? Was it exclusively to the property and or was there and element of personal expenditure included which could be disallowed?
- Can I or we justify to HMRC compliance officers in the event of a tax enquiry or tax investigation that this business expense for the property was necessary.
What Expenses Can I claim For Renting property
The types of expense that are likely to be deductible when computing property income include the following:
- Repairs and Maintenance (Excluding improvements) and Insurances.
- The cost of providing services to tenants.
- Administrative and management costs, including bad debts incurred.
- Rents paid to a superior landlord (If the property is sub-let ).
- Business rates, water rates and council tax ( If paid by the landlord ).
- Interest payable on a loan to buy or improve the property included.
Cash Basis for Rental Income and Expenditure.
Property can be grouped together when a taxpayer or company rents out more than one property and it is not necessary to calculate the profit or loss for each property individually. As from 2017-8 the government has proposed that the profit of a property business should normally be calculated on the cash basis, therefore income is taxed in the year of receipt and expenditure likewise. This is subject to a ceiling not more than £150,000 in rental income. A taxpayer can make a claim to be taxed under General Accepted Accounting Principles (Accrual Basis ) but this may not be necessary as the cash basis is usually easier to apply.
TAX RELIEF FOR INTEREST PAYABLE.
As from 2017-18 new rules are being phased in that restrict tax relief on interest payable and other financial costs in relation to buy to let loans on residential property. For tax year 2020-21 and later years tax relief on interest will be restricted to basic rate and the interest will no longer be deductible when computing property income. In the transition period, the percentage of interest payable for each year that may be deducted when computing property income is as follows:
2017-18 75%, 2018-19 50% 2019-20 25%
The remainder of the interest for the year is relieved at basic rate of 20%, as from 2020-21, none of the interest payable for the year will be deductible from property income. All of it will be treated as a tax reducer relieved at basic rate. However, the available tax reduction in any tax year is limited to basic rate income tax on the lower of:
- The amount of interest for that year that in not deductible when calculating property income ( Eg: 25% of the interest for 2017-18 )
- The taxpayers property income for the year , less any losses brought forward
- The taxpayers adjusted income for the year.
Adjusted total income is defined as the taxpayers net income for the tax year less any personal allowances to which the taxpayer is entitled.
These rules do not apply to furnished holiday lettings.
CLAIMING TAX RELIEF FOR CAPITAL EXPENDITURE ON PROPERTY INCOME
Capital expenditure in normally not deductible when computing property income but tax relief may be obtained on certain types of capital expenditure as follows:
- Tax relief may be claimed in relation to the acquisition of plant and machinery for use in the repair, maintenance or management of property which is usually defined as a commercial property. Capital allowances may not be claimed on plant and machinery provided for use by the tenants in let residential property.
- “Replacement domestic items relief “is available for the cost of replacing certain items provided for domestic use in let residential property, including furniture and furnishings, household appliances and kitchenware. Please note the following caveats.
- Relief is only available when an “old item” is replaced by a “new item”. There is no relief for the original cost of acquiring the very first item in a chain of items ( Example : The first washing machine installed in the property).
- Each property rental expenditure must be a like for like replacement and not a substantial improvement.
- Replacement domestic items relief is available whether or not the property is let furnished but the tax relief is not available for furnished holiday lettings which are taxed differently.
Whilst this subject does not come under the title of what property expenses can I claim? Nevertheless, it is still important to know the tax rules. If a taxpayer’s gross property income for a tax year is exceeded by the allowable expenditure, then the taxpayer has incurred a loss and taxable property income for the year is £0.00. The loss is carried forward and relieved against the first available property income arising in subsequent tax years. Strictly speaking, tax relief is given by deduction from the taxpayer’s total income, but the amount of relief given in any tax year cannot exceed the property income for that year.
Any loss incurred on an individual property in a tax year will automatically be set against profits arising on other profits in the same year, since property income and expenditure is generally pooled to give an overall profit or loss for the year.
As manchesteraccountants, we provide tax expertise at an extremely competitive price, to aid and assist our clients in any matters tax related issues.
If you have any queries, do not hesitate to ring us between 9am – 5pm, Monday to Friday, on 0161 278 2714.