HMRC’s first piece of advice when advising how to claim the correct expenses for property rental income is to keep accurate and up to date records.
This may seem somewhat obvious, but as you delve deeper into the tax do’s and don’ts relating to property income, the importance of these words become clear. Receipts are often overlooked, expenditure or reliefs can be claimed incorrectly, permitted expenses or reliefs may not be claimed or are claimed incorrectly and property disposals can also be overlooked.
The brief overview below details some of the areas where extra consideration is needed and where some advice may be helpful.
Repairs and Improvements
If a property is altered, improved or upgraded, the work undertaken is viewed as a capital cost and will not be allowed when calculating rental profits. However, these costs can be claimed against the proceeds when the property is disposed of in the future, thus reducing your capital gains tax. Therefore, the full details of the costs should be retained.
Should the work undertaken include the use of new materials to replace old; such as UPVC double glazing windows and doors to replace wooden framed single glazed equivalents, the HMRC will accept that this is revenue expenditure and allow it against rental profits.
But, particular care needs to be taken where work includes both elements so that it is correctly apportioned. Wherever possible, we would recommend that photographic evidence is taken before and after the work is completed, to help with this.
Legal and Professional Fees
These fees can fall into either the capital or the revenue band and the tax relief follows the same lines as property repairs or improvements. Incidental costs of obtaining finance are usually also permitted.
Costs that were incurred prior to the start of the property rental, which most commonly runs from the date of the first tenant, may still be allowed. If the costs were incurred within the previous seven years and for all other purposes would be allowable against the rental profits, they may be treated as being incurred on the day that the rental business started.
The repayment of mortgage capital cannot be claimed with finance mortgage interest. On 6 April 2017 a restriction on the tax relief was introduced and it is now necessary to ensure that the correct percentage is claimed as an expense, with the balance to be claimed as a deduction. Usually this will be 20% of the actual cost, but the calculations will be more complex if any rental losses are bought forward.
Dual Purpose Expenses
Where only part of a property is used for a rental business, you are required to show the reasoning behind any apportioned costs. This will also apply to any travel costs relating to a vehicle used for both private use and the rental business, and in this instance we would recommend that a detailed mileage log is kept for the property business related journeys, so that costs may be allocated accordingly.
Wages and Salaries
HMRC will pay particular interest to any wages or salaries that are paid to connected parties such as a spouse, civil partner or children. In these instances, you will be required to demonstrate that the payment is at a commercial rate and is commensurate with the level of overall remuneration that would be offered to a non-connected person.
Replacement of Domestic Items Relief
This refers to the replacement of a domestic item that has previously been provided to the tenant and the new item must be its nearest equivalent. For example, should a washer-dryer be purchased to replace a washing machine, the relief available would be restricted to the cost of replacing a washing machine only.
Care must be taken with claiming expenses against property income and many landlords can become confused by the variety of options. Errors, if found by HMRC can prove to be costly. Remember that additional consideration is required for jointly owned properties, properties let for free or at less than market rate, or any properties overseas. Rent, rates, council tax and services can also be accounted for and are, or may be possible to claim, depending on individual circumstances.