Claiming allowable expenses will reduce your taxable profit or increase the loss that can be carried forward to the next tax year and result in minimising your tax liability.
It may be that you are not currently making a profit on your rental property, however this doesn’t have to result in unclaimed expenses. The losses can be rolled forward year on year until you make a profit at which point you can use the accumulated losses against the profits.
Did you know, that if you have different property businesses, for example, residential letting, holiday letting etc, then the losses from each business cannot be set off against the profit of another, it can only be rolled forward until that business makes a profit.
Don’t guess at getting it right, get an accountant, contact us today and let us deal with everything for you.
1. Claiming expenses
Expenses fall in to two categories ‘Revenue’ and ‘Capital’.
Any revenue expenses can be deducted from rental income for tax purposes thus reducing the amount of tax paid on profit or increasing a loss..
It is not always easy to determine whether a cost is of a revenue nature or of a capital nature.
For example, if you have a new conservatory built, or a new bedroom added, then this is clearly an improvement to the property and is a capital expense. This is because it has enhanced and increased the value of the property and is considered an ‘improvement’ as opposed to a repair.
Consider the replacement of windows. If you currently have rotten single glazed windows, then you will be able to replace them with UPVC double glazed windows. HMRC now consider such expenditure as revenue (repair) rather than an improvement even though the property has been ‘improved’ by replacing single glazing with double glazing. Therefore the cost of replacing windows is deductible against rent.
A common mis-conception is if something costs a lot then it must be capital, that is not the case, take for example a roof repair, it may cost £2,000, it is still a repair and will not have enhanced the property to make it more valuable, therefore it is a revenue expense and set against rents.
However, you can still claim the cost of repairing items, for example, if you need to repair a stand alone fridge at a cost of £50 this would be allowed, if you need to replace the stand alone fridge the cost of replacing it is not allowed. However if the fridge is integral to the kitchen then the cost of replacement is allowed as a repair to the kitchen.
Claiming expenses against residential property letting can be a minefield and we will be happy to discuss your situation with you and advise you accordingly. Contact us today.
2. Claiming tax relief on all your property expenditure
Remember that if you have incurred a revenue expenses in letting out a property, you can offset it against the rental income.
This means that you can continue to lower your tax bill – legitimately. Most property investors are aware that they can offset mortgage interest, insurance costs, rates, the cost of decorating/repairs, wages and costs of services etc.
But so many property investors fail to claim the following costs, which, when added together, can provide a significant tax saving:
- Travel costs to the investment property
- Advertising costs
- Telephone calls made in connection with the property
- Cost of gas/electric safety certificates
- Bank charges incurred
- Professional fees for example Accountancy and Legal Fees
- Subscription to property investment magazines, products and services
3. Rental losses
If you have made a loss on your rental property then you can roll the loss forward to the next tax year, any future losses continue to accrue until you start to make a profit. During the tax year in which your property generates a profit you will be able to offset losses from earlier years against the profit.
Other considerations, if you own a mixed property portfolio consisting say, of UK residential, UK holiday and overseas residential, each of the different types are separate businesses, losses from one cannot be set off against any of the other businesses. Losses simply roll forward until such time that business starts to make a profit.
In order to take advantage of accruing losses you must notify HMRC of such losses, the easiest way to do this is via completion of a Self Assessment Tax Return.
For a quote on Tax Advantage preparing your accounts and tax return please complete the contact form and we will get back to you.
4. Married couples and rental property
If you and your spouse hold a property jointly the income/expenses will be split 50:50 even if the property is held in unequal proportions. You can elect to have the income taxed in same proportion as the percentage of legal ownership of the property, you do this by making an election to HMRC to disclose the income on the same basis as the share of legal ownership.
In a situation where one spouse owns outright a property and is a higher rate taxpayer, and the other spouse is a non taxpayer or basic rate tax payer, there is a solution. The higher rate spouse could transfer a small percentage of the property to the other spouse, say, 1%, this would allow the whole of the income to be split on a 50:50 basis, remember with married couples income is always deemed to be 50:50 regardless of the actual legal ownership. This option would allow half the income to be taxed at either 0% or 20% depending on the tax status of the spouse.
5. Wear & tear allowance (furnished property)
If you let out a fully furnished property then you have the option of claiming a 10% wear & tear allowance as a 10% deduction against rental income.
The definition of ‘fully furnished’ for the purpose of claiming wear & tear would be to a level akin to a holiday let. Part furnished properties do not attract this allowance.
Wear & Tear allowance is used to cover the cost of repair and replacement for soft furnishings, white goods, televisions, and other chattels. You cannot claim the cost of repairing any items that are covered under wear & tear.
Once you start to rent out a fully furnished property you have to make the choice between claiming the repairs basis or wear & tear. It is usually most beneficial to claim wear & tear as you can realise this allowance immediately were as on a repairs basis you have to wait until you repair it, you cannot claim the cost of buying the item initially or the cost of replacing it.
You will still claim the repairs basis for items not covered under wear & tear, these will be integral fittings in the property, a fitted kitchen, bathroom etc.