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Residential properties

You or your company must pay tax on the profit you make from renting out the property, after deductions for ‘allowable expenses’. The expenses must be wholly and exclusively for the purposes of renting out the property. This means that if an expense wasn’t incurred for the purpose of your property rental you can’t offset the cost against the rental income.

Allowable expenses are things you need to spend money on in the day-to-day running of the property, like:

  • letting agents’ fees and management fees

  • legal fees for lets of a year or less, or for renewing a lease for less than 50 years

  • accountants’ fees

  • buildings and contents insurance

  • interest on property loans

  • utility bills, like gas, water and electricity

  • rent, ground rent, service charges

  • Council Tax

  • services you pay for, like cleaning or gardening

  • other direct costs of letting the property, like phone calls, stationery and advertising for new tenants

  • vehicle running costs (only the proportion used for your rental business) including mileage rate deductions for business motoring costs

Costs of maintenance and repairs

  • maintenance and repairs to the property as long as they are a like-for-like replacement and not an improvement.

Examples of typical maintenance and repair costs.

A repair restores an asset to its original condition, sometimes by replacing parts of it.

Replacing a part of the property with the nearest modern equivalent is still a repair if the improvement is incidental to the repair, such as replacing a single-glazed window with a double-glazed window.

If you have an insurance policy that covers the cost of some repairs to your property, you can only claim the additional expenses that you incurred for repairs which the insurance pay-out did not cover.

This also applies if you keep your tenant’s deposit from a Tenancy Deposit Scheme to cover damages they have caused to the property. You can only claim expenses incurred for repairs in excess of the amount of the deposit that you retained.

repairing water or gas leaks, burst pipes

repairing electrical faults

replacing broken windows, doors, gutters, roof slates/tiles

repairing internal and external walls, roofs, floors

repainting and redecorating (but not improving) the property to restore it to its original condition

treating damp or rot

re-pointing, stone cleaning

hiring equipment to carry out necessary repair work

replacing existing fixtures and fittings, such as radiators, boilers, water tanks, bathroom suites, and kitchens, but not electrical or gas appliances

Expenses you can’t claim a deduction for include:

  • the full amount of your mortgage payment - only the interest element of your mortgage payment can be offset against your income

  • private telephone calls - you can only claim for the cost of calls relating to your property rental business

  • clothing - for example if you bought a suit to wear to a meeting relating to your property rental business, you can’t claim for the cost as wearing the suit is partly for your rental business and partly to keep you warm - no identifiable part is for your property rental business

  • personal expenses - you are unable to claim for any expense that was not incurred solely for your property rental business

Claiming part expenses

You might incur a cost where only part of it is expense for your property rental business. If a definite part of a cost is expense incurred wholly and exclusively for the property business, you can deduct that part.

For example, if a property is used for private purposes for 3 months and commercially let for 9 months, then 9/12 of the mortgage interest can be deducted from the rental income.

Increasing your mortgage

If you increase your mortgage loan on your buy-to-let property you may be able to treat interest on the additional loan as a revenue expense, as long as the additional loan is wholly and exclusively for the purposes of the letting business.

Interest on any additional borrowing above the capital value of the property when it was brought into your letting business isn’t tax deductible.

If the mortgage is for a residential property then the restrictions on interest from April 2017 will apply.

Capital expenditure

Expenses which you are unable to claim are generally ‘capital expenses’ if they will be used in the business over a longer period of time, such as when you:

  • add something to the property that wasn’t there before

  • alter, improve or upgrade something that was existing

  • include the purchase of furnishings and equipment for the property

Capital expenses aren’t allowable and can’t be claimed against your rental income but you should keep records of them as you might be able to set them against Capital Gains Tax if you sell the property in the future.

These are examples of capital expenses that wouldn’t normally be allowable:

  • adding an extension

  • installing a security system if there wasn’t one before

  • replacing a kitchen with one of a higher specification

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The Chalfont Bookkeeping Service Limited

Incorporated in England

Co. Registered No. 11778865

 

Tel: 07960 499 267

Address: Denham Lane,

Chalfont St Peter ,

Gerrards Cross,

Bucks,

SL9 0ES

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