In the last few years, landlords of residential properties have been subject to multiple changes to their allowable deductions. The main one is the tax relief of mortgage interest.
As mortgage interest can no longer be deducted from the rental profits before the tax is charged, this can mean that individuals lose their personal allowance or even pay a higher rate of tax due to the interest not being a deductible expense. Therefore, this article explains some of the various expenses you are allowed to deduct from your rental income before tax is payable.
Accountant fees
The fee you pay to your accountant for the preparation of your tax return. Software that you may use for record keeping are all part of the costs.
Agent fees
Payments made to a managing agent including the arrangements of new tenants, monthly management and reimbursement of costs.
Cleaning/gardening
Sometimes when we have a change of tenants, the rental property may need a deep clean and this essential in the current climate. If the rental property is a house, the property may have a garden. Sometimes the tenant may not be able to maintain the garden and so as a landlord you are able to supply garden maintenance.
Insurance
A landlord would normally insure the building but not always the contents of a property. Some landlords also take out landlord insurance.
Motor and travel costs
You may need to visit the property from time to time and to check on the state of your rental property. You have a huge investment and ensuring it is safe is only natural.
Repairs
Costs such as gas safety and general repairs are standard costs and allowable. The main issue arises regarding whether some costs are an improvement or a repair. This is considered later in this article.
Service charges
If you have a flat, you may have to pay service charges or ground rent.
Utilities
Council tax, electricity, gas, water and other utility bills are all costs that a landlord will need to incur at some time, especially when the property is empty.
The main question asked is whether a cost is an improvement or a repair. Improvements are generally not allowable as a deduction, whereas repairs are.
If you add a room to the property or enhance the value of the property, this is usually classed as an improvement.
Improvements are added to the cost of the property and used to reduce the profit generated when the property is sold, and hence reduce the capital gains tax payable.
It is a general rule of thumb that like for like repairs are treated as a repair on a rental property. However, repairs carried out on a property soon after purchase may be treated as capital if this was reflected in the price paid for the property. The purchase of a cheap property may incur huge repairs at the outset and these may be classed as improvements.
If you repair or replace a like for like boiler and radiators, these are treated as a repair. However, if included in this work is the addition of extra radiators, the whole cost is treated as an improvement.
There is a very fine line between repairs and improvements. Repairs are deducted from your rental income to reduce the income tax you pay on your profits. Improvements are capital in nature and reduce the profit made when the property is sold for capital gains tax purposes.
This covers just some of the allowable costs you can deduct from your rental income to reduce your profits and therefore reduce your income tax liability
Please always seek professional advice. before taking any action. We are happy to answer questions in future issues. Please send your questions through the contact us page on our website: www.champconsultants.co.uk
