In common with other types of business, expenses are unavoidable when running a property business. However, subject to certain conditions, it is possible to obtain tax relief for the expenses of running a property business.
The general rule is that a landlord can deduct revenue expenses which are incurred wholly and exclusively for the purposes of renting out the property.
Examples of typical expenses incurred by a landlord running a property business for which a deduction may be available include:
No relief is available for costs met by the tenant. Typically, a tenant in a buy-to-let would pay the utility bills and the council tax. However, where a landlord lets furnished holiday accommodation, the utility bills and any business rates may be paid by the landlord. These can be deducted.
Landlords running a property business cannot deduct interest and finance costs, such as mortgage interest, when calculating their taxable profit. Instead, they can deduct 20% of those costs from the tax that they owe. The deduction is capped at the amount of tax – it cannot generate a repayment. However, any unrelieved interest and finance costs can be carried forward.
These rules do not apply to furnished holiday lettings, in respect of which interest and finance costs can be deducted in full in calculating profits.
Relief is only available for business expenses, and where an expense is incurred for both private and business purposes, relief is only available if the business element can be separately identified. If a car is, for example, used both privately and for the business, relief is available for business mileage costs, but not private journeys. Approved mileage rates can be used.
Separate rules also apply to domestic items, such as furniture, furnishings and white goods, in a residential let. No relief is available for the initial cost of the item, but where the item is replaced, the cost of a like-for-like replacement can be deducted in calculating profits.
These rules do not apply to furnished holiday lettings.
The treatment of capital expenditure depends on the way in which the accounts are prepared. The cash basis is the default basis where rental receipts do not exceed £150,000. Where this is used, capital expenditure can be deducted in calculating profits unless such as deduction is expressly prohibited. The main exclusions are land and buildings and cars.
Under the accruals basis, relief is available either in the form of capital allowances (which are limited in a residential let) or when computing the gain on the eventual sale.
It is important to keep good records of expenses so nothing is overlooked.
Partner note: ITTOIA 2005, Pt. 3, Ch. 3.