There are about 2.66m private landlords in the UK. Although renting out property can offer excellent returns, it involves a wide variety of expenses, big and small.
Thankfully, as you know, many costs can be claimed as "allowable expenses", which buy-to-let landlords can deduct from their profits, to help minimise their income tax bill. But many buy-to-let landlords fail to claim some allowable expenses, which can leave them overpaying hundreds if not thousands of pounds each year in tax.
This guide provides a basic overview of allowable expenses that landlords can claim, as well as ones that they may not be claiming.
Here's what we'll cover:
- Why buy-to-let landlords often fail to claim some allowable expenses.
- Allowable expenses that landlords can claim.
- Allowable expenses that buy-to-let landlords often fail to claim.
- How property maintenance, repairs and improvements are considered.
- Expenses buy-to-let landlords cannot claim.
Why do buy-to-let landlords fail to claim allowable expenses?
A big reason why some buy-to-let landlords' allowable expense claim is lower than it could be is poor expense management. Obviously, this commonly includes losing receipts for purchases for which they could otherwise claim. Other buy-to-let landlords deem a cost so insignificant that they don't think it worth the time or effort to record. But such costs can mount up over the year, so, where allowable, they should be encouraged to claim them all.
Lack of knowledge is the other key reason why some buy-to-let landlords fail to claim their full allowable expenses. They simply don't know that certain expenses are allowable for tax purposes. In some instances, they might suspect that they can claim, but don't, because they fear breaking the rules and getting into trouble with HMRC.
Some simple desk-based research can enable landlords to quickly find out which outgoings they can claim as an allowable expense. However, some online sources of information are less accessible and reliable than others, which is why advice from a trusted tax professional can make a big difference.
What are "allowable expenses"?
For an expense to be allowable for tax purposes, it must be generated "wholly and exclusively" for the purpose of trade (in this case, renting out property). So, for example, a landlord cannot claim as an allowable expense a vacuum cleaner that they also use for cleaning their own home.
If they use something for business and personal reasons (eg their mobile phone), they can only claim allowable expenses for the proportion that results from renting out their property.
Some allowable expenses are more obvious than others. For example, a buy-to-let landlord may well know that they can claim for Council Tax, water rates, gas and electricity, if they pay these for the rented property (otherwise the tenant pays them, obviously).
They can also claim as an allowable expense ground rents and service charges, as well letting agent fees and management fees. Landlords' insurance policies for buildings, contents and public liability can also be claimed as an allowable expense.
Need to know! The introduction of "Section 24" in 2017 removed a landlord's previous right to deduct mortgage interest and other finance costs (eg mortgage arrangement fees) from their rental income before calculating their tax liability. Instead, landlords now get a tax credit of 20%.
Allowable expenses: what might landlords not be claiming for?
To maintain their property, a landlord may do some gardening, DIY or end-of-tenancy cleaning to save money, rather than paying someone else to do it. However, they can claim such services as an allowable expense, which could save them the trouble.
Landlords can also claim for some legal fees (eg for advice about pursuing a tenant for unpaid rent) and rather than doing their own bookkeeping or tax returns, they could hire an accountant and claim their fees as an allowable expense.
A landlord may be using their own landline or mobile phone for making calls that result from renting out their property. This proportion of their total bill can obviously be claimed as an allowable expense, and the same applies to vehicle mileage costs (eg if they need to travel to their rental property or make any other related journeys).
Some landlords may not realise that they can claim for advertising their property to attract new tenants, or that even relatively small costs, for example, stationery, can be claimed as an allowable expense. They may even be able to claim for costs incurred to dispose of old items of furniture or electrical appliances.
What about property maintenance, repairs and improvements?
Costs landlords pay out to maintain and repair a rental property to ensure that it retains its condition can be claimed as an allowable expense. Common examples include redecorating a property between tenants, fixing a broken window or mending a garden fence. If a landlord claims on their insurance to cover a repair, obviously, they cannot also claim it as an allowable expense. The same is true if their tenant pays for damage out of their deposit.
Replacing baths, washbasins and toilets is allowable, because they're classed as building repairs, but only if the landlord replaces like for like (ie the quality isn't superior).
Landlords cannot claim "capital improvements" as an allowable expense. Making capital improvements means upgrading, adapting or enhancing a property so that its value increases, which often involves making a structural change, for example, building an extension or converting a loft.
Need to know! Capital expenses aren't allowable, so landlords can't claim for them against their rental income, but they may be able to set them against Capital Gains Tax if they sell the property later on.
What can't buy-to-let landlords claim for?
As explained on GOV.UK: "[Landlords] cannot claim the costs for replacing furnishings or equipment in a [rental] property. These are not allowable as costs of maintenance and repairs, but from 6 April 2016 they may qualify for Replacement Domestic Items relief."
So, if the property is furnished or part-furnished, a landlord may be able to claim tax relief for replacing such things as sofas, beds, carpets, curtains, fridges, washing machines, sofas, crockery, cutlery, etc, as long as the quality is comparable – not superior.
Buy-to-let landlords cannot claim installing a security alarm system as an allowable expense unless they're replacing one of a similar standard that was already there. If they're in any doubt about what they as a buy-to-let landlord can and cannot claim as an allowable expense, you can add much value to the relationship by providing them with sound advice.
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