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Landlords often ask what they can claim as business expenses and are surprised by the answer.
HM Revenue & Customs has no definitive list but works on the 'wholly and exclusively' rule.
This rule states that landlords can claim any expense, provided the outlay was purely for business purposes, and the money was not spent on capital expenses.
HMRC will also accept apportioned or split expenses.
For instance, landlords can claim the cost of business calls made on a mobile phone bill but not the cost of any personal calls.
Saying this, HMRC has squirrelled away a list of property business expenses in online guidance for tax inspectors.
Below are the expenses on the list. You can read more about business expenses in HMRC's Property Income Manual.
Landlords should monitor their spending closely. Every pound spent reduces their taxable profits by a pound, which means a lower tax bill at the end of the year.
Claiming every available business expense is not tax avoidance but good financial management.
Landlords should keep good financial records, including receipts, bank statements and other payment documents. In addition, you can keep scans or originals.
Here is HMRC's list of property business expenses outlined in the Property Income Manual:
Advertising
Claim the bill for advertising for new tenants but not permanent signs, which are capital costs.
Bad and doubtful debts
Write off debts that are not recoverable, like rent arrears or the cost of repairing damage, provided you have taken all practical steps to recoup the money.
Landlords can't keep a general debt reserve as a float to cover unspecific debts or write off debts from slow payers.
Business rates and Council Tax
Landlords will pay business rates on holiday lets, but tenants will likely pay the Council Tax on a buy-to-let rental.
If the tenancy agreement says the landlord pays Council Tax, the total amount paid is allowed as a business expense.
Common ownership costs
The landlord can claim for the upkeep of parts of a house in multiple occupation (HMO) or a block of flats that are not let but used by tenants. These could include storage space, outside paths, hallways, or kitchens.
Cost of providing services
Deduct the cost of providing services as a business, for example, cleaning, gardening, or window cleaning.
Fees for loan finance
Landlords can claim any fee paid to a mortgage broker or lender, including the incidental costs of obtaining finance.
Finance means a mortgage, loan or other types of credit.
The finance must be wholly for the business, but the security can be any property, including the landlord's home.
Home as office
If a landlord runs a property business from a home office, a proportion of the running costs are allowed as a business expense. For example, the claim may cover heating, lighting, broadband, home insurance, repairs, and maintenance.
Insurance
Landlords can carry three types of insurance to cover the risk:
· Damage to property (buildings cover)
· Damage to a rental property's contents owned by the landlord. Tenants must arrange cover for their belongings.
· Rent arrears
Claiming the cost of premiums is allowed for comprehensive or standalone cover.
Landlords can offset the cost of insurance for a tenanted rental home or an empty home that is available to rent.
Legal and professional costs
Landlords offset professional fees for buying or selling rental property against capital gains tax.
Revenue costs include letting agents, legal expenses related to a tenancy agreement, eviction or recovery of rent arrears, accountancy costs, licensing costs, surveys for insurance purposes, and subscriptions to landlord organisations (such as the Guild of Residential Landlords).
Mortgage interest
Mortgage interest is not included in a landlord's profit and loss statement but is recorded separately.
HMRC allows landlords to deduct a 20% tax credit for mortgage interest relief from property business profits before working out any tax due.
For example, if a landlord pays out £10,000 a year in mortgage interest, the relief is £2,000.
Repairs and maintenance
Repairs and maintenance involve replacing parts of the home that are already there, such as putting back tiles blown off the roof or redecorating. Adding to a home, such as building an extension or loft conversion, is dealt with under capital gains tax rules.
Some works that appear to be an upgrade may also be treated as a repair, such as replacing single glazing with double glazing, as that is the closest modern equivalent.
Salaries and wages
Landlords cannot pay themselves for time spent running a property business but can pay a spouse or other relatives. The payment must represent a market rate for the work they carry out.
The claim covers gross salary and regular pension payments, not one-off lump sums.
Travel expenses
Travel expenses include fixed-rate mileage charges or vehicle running costs.
Most landlords claim mileage costs unless the vehicle use is exclusive to the business, like a van.
To make a claim, keep a mileage log showing the trip's date, the start and finish locations, and the distance travelled.
Travel between rental properties is allowed, but trips from home to a let property and back are only allowed if the journey is purely for business.
Property business expenses landlords should not claim
Besides listing allowed property business expenses, HMRC guidance also pinpoints some excluded claims:
Entertaining expenses and gifts
Any business entertainment is excluded as an expense, including buying a cup of coffee for a tenant.
Fines and penalties
No claim is allowed for fines or civil penalties – including parking tickets.
Claiming a settlement is allowed for a civil action related to a rental business when the allegations were not admitted or proved.
If the allegation was admitted or proven, the sum making good a loss is allowed.
Uncommercial lets
If you let a home rent-free or discounted rate as a favour, the property is an uncommercial let.
These properties are tax-neutral, meaning expenses are only claimed up to the rent value, so there is no profit or loss.
Although no income tax is due on uncommercial lets, capital gains tax applies.