Buy-to-let rental expenses tax treatment is an area of tax law that can be quite confusing and which has seen significant changes over the past few years.
Of particular concern to landlords is what can be classed as revenue expenditure (which can be claimed back against income tax/corporation tax) and what can be classed as capital expenditure (which can not be claimed back against income tax/corporation tax but can be claimed back against capital gains tax/company profit on the sale of a buy-to-let property).
In this article, we’re going to look solely at revenue costs.
Buy-to-let rental expenses tax treatment – wear and tear
Prior to 6th April 2016 for income tax payers (1st April 2016 for corporation tax payers), landlords could claim an automatic 10% of the net rent collected from a property as their wear and tear allowance.
This has now been abolished.
Landlords may now only claim for like-for-like replacement of furnishings, appliances, and kitchenware in their rental properties. The replacements must not be of a better quality than the originals and they can’t add anything extra (for example, the creation of more storage space in a kitchen or the replacement of a roof but with added window lights).
You can also claim for the disposal of the old equipment you’re replacing. Please make sure you keep all receipts and ask your contractors to specify the nature of the work being done on their invoices to you.
SMART TEAM tip – HMRC now accepts the replacement of single glazed windows with double glazed windows as a replacement and not an improvement.
Buy-to-let rental expenses tax treatment – mortgage costs
We are currently halfway through a process where the previous allowance of all mortgage interest payments as revenue expenditure is being replaced by a 20% tax relief instead.
Here’s a look at how this change will affect the profit you make and the tax you pay on a property over the five tax years starting in 2016/2017…
|40% taxpayer||YR 16/17||YR 17/18||YR 18/19||YR 19/20||YR 20/21|
|Reduction in mortgage interest allowance||£0||-£938||-£1,875||-£2,813||-£3,750|
|Tax at 40%||£1,700||£2,075||£2,450||£2,825||£3,200|
|Mortgage Relief Due||£0||£188||£375||£563||£750|
In this example, the landlord is receiving £10,000 a year in rent with mortgage interest costs of £3,750 and other costs of £2,000. In the 16/17 tax year, his/her profit is £4,250 on which tax is paid on £1,700. By the time the changes are fully implemented in 20/21, that profit, in exactly the same circumstances, has increased to £8,000 on which £2,450 tax is due.
Buy-to-let rental expenses tax treatment – redecoration
Getting to the whole crux of the capital versus revenue debate is the issue of redecoration.
Normally, redecoration is a revenue expense. However, if a redecoration forms part of a wider overall improvement to the property, everything, including the redecoration, is treated as capital expenditure.
Buy-to-let rental expenses tax treatment – professional costs
You’re able to claim your rental accounts prepared by the Smart Team against your income or corporation tax. However, the preparation of your personal tax return is a private expense and cannot be claimed back.
If you need to engage with your solicitors for either conveyancing, debt recovery, or tenant eviction, for example, that is deductible as are any fees you pay your letting agent or costs you incur advertising the property for rent.
Buy-to-let rental expenses tax treatment – travel costs
You can claim back travel costs involved as revenue expenditure when you go to inspect a tenant’s property or you have to visit the property for a business-related reason.
You will have to keep notes on your movements together with the necessary petrol/diesel receipts for inspection by HMRC for six years.
Buy-to-let rental expenses tax treatment – take advice
HMRC are serious about collecting the right amount of tax from landlords, so much so that one of the three campaigns they are running (at time of writing) is targeted specifically towards this sector.
For help with all areas related to being a landlord, speak to our team to find out how we help. Please call 01202 577 500 or email us on [email protected]