Property Rentals – An Overview
I give here a brief overview of SOME of the INCOME tax considerations that need to be borne in mind if you rent out property. As always you need to seek professional advice.
The expenses you can deduct from letting income (unless it’s under the Rent a Room scheme) include:
letting agent’s fees
legal fees for lets of a year or less, or for renewing a lease for less than 50 years
buildings and contents insurance
interest on property loans
maintenance and repairs to the property (but not improvements- see below)
utility bills such as gas, water and electricity
rent, ground rent, service charges
services you pay for, such as cleaning or gardening
other direct costs of letting the property, such as phone calls, stationery and advertising
10% wear and tear allowance (only on furnished accommodation – see below)
When you work out your profit, you can’t deduct:
‘capital’ costs, such as furniture or the property itself
personal expenses – costs that aren’t to do with your letting business
any loss you make when you sell the property
But you may be able to claim some allowances instead.
All letting properties
You cannot claim capital allowances for furniture and fixtures for use in a dwelling house if you have a property rental business unless it qualifies as a furnished holiday lettings business.
Whatever letting it is, you can claim a capital allowance on the cost of things that you need for running your property letting business, such as a computer. You can also claim for equipment that isn’t for the use of a single let property, like a new fire alarm system for a block of flats.
Furnished Properties – Summary
Income from furnished lettings is part of the taxpayer’s rental business. Generally the same rules apply as for other lettings.
But where a taxpayer lets a residential property furnished, plant and machinery capital allowances can’t be claimed on furniture, furnishings or fixtures within the property. Instead a deduction can be claimed for either:
a wear and tear allowance of 10% of the ‘net rent’ from the furnished letting to cover the depreciation of plant and machinery, such as furniture, fridges etc supplied with the accommodation,
the net cost of replacing a particular item of furniture etc, but not the cost of the original purchase; this is called a ‘renewals allowance’
A taxpayer may let both furnished and unfurnished property. If so, you must ensure that the 10% is calculated only on the net rent from the furnished lettings.
If a landlord receives a premium for the grant of a lease of furnished residential property then the chargeable amount of the premium is included in the ‘net rent’ for the purposes of computing the 10% wear and tear allowance for the relevant tax year (see PIM1200 onwards).
Revenue Vs Capital Items
It is very important to distinguish between revenue and capital costs. One is allowable against rental income and the other isn’t.
Repair means the restoration of an asset by replacing subsidiary parts of the whole asset. There won’t be a repair if there is a significant improvement of the asset beyond its original condition – that will be capital expenditure.
Examples of common repairs that are normally deductible in computing rental business profits include:
exterior and interior painting and decorating,
damp and rot treatment,
mending broken windows, doors, furniture and machines such as cookers or lifts,
replacing roof slates, flashing and gutters.
The cost of Land & buildings is of course capital. Other examples of capital items are:
expenditure which adds to or improves the land or property; for example, converting a disused barn to a holiday home,
the cost of refurbishing or repairing a property bought in a derelict or run-down state,
Capital costs are not Allowable as deduction against rental income
In some cases capital expenditure on a property (but not the land itself) may qualify for ‘capital allowances’. For example an allowance maybe due for the cost of installing loft, cavity wall or solid wall insulation, draught proofing or insulation for hot water systems in a residential property that is let.
Whether something is Revenue or Capital is largely a question of fact and degree and in each case whether expenditure on a property leads to an improvement.
Sometimes the improvement may be so small as to count as incidental to a repair. In the absence of other capital indications, the entire cost is then revenue expenditure.
Problems can arise where the taxpayer does work on an old asset. A repair or replacement of a part of a building using modern materials may give an apparent element of improvement because of the greater durability, superior qualities and so forth of the new material. But the cost normally remains revenue expenditure where any improvement arises only because the taxpayer uses new materials that are broadly equivalent to the old materials. Where a significant improvement arises from the change of materials, the whole of the cost is capital expenditure.
There may of course be a combination of revenue and capital items in which case some will be allowable and others will not.
Each case and item of expenditure needs to be considered carefully.
It is very important that you keep good records of your expenditure in case of a dispute with HMRC.
You should always seek professional advice and if need help and guidence please do not hesitate to contact me on [email protected] or visit my website www.pmarks.co.uk
Paul Marks & Co Chartered Accountants is the trading name of Paul Marks Ltd a Limited Company registered in England and Wales (registered number 4487645). This article is designed for the information of readers only and readers should not act on any of the information contained in this article without seeking professional advice. Nothing in this article constitutes advice, nor does the transmission, downloading or sending of any information or the Material create any contractual relationship. Links to third party websites are provided as a convenience to the reader, Paul Marks Ltd does not control and is not responsible for any of those websites or their content. Paul Marks Ltd accepts no liability or responsibility whatsoever for any loss or damage suffered by any user of the information contained on or accessed through this article or the Material downloaded.