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What expenses can be claimed for a buy-to-let property business?

The Buy-to-Let Property Tax Handbook

The following table sets out a reasonably comprehensive list of the types of expenditure a landlord might expect commonly to incur in a buy-to-let business.

Accountancy fees

Note HMRC’s Property Income manual states (at PIM2205):

‘Cost of taxation accounts and negotiations

Fees incurred on preparing accounts for commercial reasons and on many other accountancy services will meet the ‘wholly and exclusively’ test. Hence the cost can be deducted in computing rental business profits.

Strictly, any additional fees incurred for computing and agreeing the tax liability on rental business profits are not deductible. But, under a long-standing practice, normal recurring legal and accountancy fees incurred in preparing accounts or agreeing the rental business tax liability can be deducted.

This practice does not extend to other personal fees; for example, fees incurred on preparing a tax return or working out CGT due.’

Note that the Capital Gains manual at CG15280 says that accountancy fees in relation to the ascertainment of market value or to any apportionment for the purposes of the CGT computation may be allowed, but that ‘otherwise, fees for the computation of liability are not allowable’.

Advertising for tenants

Generally allowable under the ‘wholly and exclusively’ rule for business expenditure (ITTOIA 2005, s 34; CTA 2009, s 54).

Agents’ fees/letting fees

Generally allowable where incurred in relation to ongoing let property (eg, as a monthly, quarterly or an annual cost) – but see Legal and professional costs below

Bad and doubtful debts

Income should normally be recognised when it is due, rather than when it is received (unless operating the cash basis). However, where steps have been taken to recover a tenant’s debt but without success, or it is otherwise reasonable to believe that a debt will not be paid, it is possible to write off or to provide for bad/doubtful debts accordingly. HMRC will, however, resist a simple provision that has not been gauged against a specific, or specific categories of, debtor (see BIM42701; PIM2054).

Corporation tax works according to the rules for loan relationships, (CTA 2009, Pt 5) but the regime will basically allow relief for non-trading loan relationships in relation to the impairment of a relevant non-lending relationship (Pt 6) unless the parties to the loan relationship are deemed to be connected.

For more on the cash basis and on loan relationships, see Chapter 2.

Cost of collecting rents/enforcing debts

Income tax: Allowable in line with agents’ and professional fees generally.

Corporation tax: Similarly allowable, in line with the rules for loan relationships, as per Bad and doubtful debts above.

Cost of services provided, eg:

  • Cleaning/waste disposal;
  • Concierge;
  • Gardening;
  • Heat and light, gas, electricity;
  • Water rates;
  • Service charge (eg, for apartments)

Where the landlord occupies the property for part of the year, it will be appropriate to consider restricting the deduction for business expenses in line with the extent of business use.

This may not necessarily be a simple time apportionment: if the property is occupied privately out of summer season, for instance, it may be appropriate to recognise a relatively higher private use proportion of heat and light due to less extensive consumption in the commercial period.

Some expenses, however, such as cleaning, gardening and waste disposal, may be undertaken only directly before or after a commercial letting, in which case apportionment may not be necessary.

See also Service charges separately below.

Council tax, rates

Generally deductible, although costs are usually borne by the tenant(s). Commonly incurred during void periods and therefore allowable if, at the time the cost is incurred, the property is held out for letting. See PIM2030.

Insurance

Premia on insurance policies covering:

  • the risk of damage to the fabric of the property;
  • the risk of damage to the contents; and
  • loss of rents

will be allowable if paid for the purposes of the rental business. Allowable deductions will include premia in respect of properties that are held for letting but vacant for the time being, as well as properties that are let.

Amounts received are usually set against the costs incurred to make good damage, etc., while proceeds of a claim for loss of rents are taxable as rental income. See PIM2040 and BIM45510.

Interest – mortgage/loan interest

Generally allowable; see Chapters 2 and 3.

Lease premium paid

See Chapter 1.

Legal and professional costs

Generally allowable on the basis that they are incurred for the purposes of the letting business. According to HMRC (see PIM2205), acceptable deductions include:

  • Obtaining a valuation for insurance purposes;
  • Arbitration to determine the rent of a holding;
  • Evicting an unsatisfactory tenant in order to re-let the property.

However, note also the following (from PIM2205):

‘The expenses incurred in connection with the first letting or subletting of a property for more than one year are capital expenditure and therefore not allowable. The expenses include, for example, legal expenses (such as the cost of drawing up the lease), agent’s and surveyor’s fees and commission. Expenses for a let of a year or less can be deducted.’

Of course, there are conflicting demands in relation to the duration of letting arrangements.

The guidance goes on to say:

‘Where a replacement lease follows closely on a previous one, and is in broadly similar terms, a change of tenant will not normally make the associated legal and professional costs disallowable. Any proportion of the legal or other costs that relate to the payment of a premium on the renewal of a lease will, of course, remain disallowable.’

Maintenance, repairs and decoration

Where related to general upkeep of a property, allowed as a deduction for either income tax or corporation tax purposes.

See Chapter 2.

Motor expenses

If incurred for business travel, should be deductible; where capital allowances are claimed, a suitable restriction for private use should be considered. See 2.9 for details of mileage allowance.

See also Travelling expenses below.

Office expenses:

  • Printing, postage, stationery;
  • Telephone and internet;
  • Use of home as office.

Expenditure on eligible equipment, such as laptops, office equipment, tools, etc, for use outside of let dwellings may be claimable for capital allowances, with a suitable restriction for private use, if appropriate. May also be claimed as a simple deduction under the cash basis – see Chapter 2.

Business calls and broadband should be allowable. A restriction for private use may be appropriate unless private use is insignificant.

See also HMRC’s Business Income manual at BIM47820 and BIM75010.

Renewals basis

Replaced by new ‘Replacement of domestic items relief’ in FA 2016; see Chapter 5.

Rent as a cost, ground rent

Generally allowable (see PIM2025); claim may need to be restricted where there is also private occupation.

Service charges

Service charges may contain both ongoing running costs (generally allowable) and funds for capital improvements. Apportionment may be appropriate to reflect any periods of private use.

Capital improvements, as distinct from repairs, may not be allowable as a revenue deduction on basic principles, but note that the restriction on capital allowances applies to dwelling areas, and not normally to common areas.

Eligible expenditure in common areas, such as security installations, lighting and lifts may be claimable for capital allowances purposes; see Chapter 4.

Subscriptions

Subscriptions to associations representing the interests of landlords (see PIM2205).

Travelling expenses

The cost of travelling to inspect or maintain properties, or to meet tenants or advisers, will normally be allowable.

See PIM2210 for more on HMRC’s position.

Wages

Where paid to family members, should be commercially justifiable. Normal rules for operating a payroll apply, regardless of whether to family members, eg:

  • RTI – where applicable;
  • Workplace pensions.

Wear and tear allowance

Not available after 1/6 April 2016 for corporation/income tax purposes; see Chapter 5.

By Bloomsbury Professional