- Churchill Tax
PROPERTY: Tax Deductions For New Landlords
Our subscriber is preparing accounts for the first year of his property rental business during which he spent a lot of money getting the properties ready for letting. His question is how much of the expenditure is tax deductible?
New property business
In 2021 our subscriber bought two properties with money he inherited. His plan was to bring them up to date and let them. If all went well, he hoped to buy more properties with the aim that they would provide him with income during retirement. He spent a fair amount on redecoration, repairs, structural work, fixtures, fittings and furnishings. Despite reading HMRC’s guidance he wasn’t sure what tax deductions he was entitled to.
Furnishings and equipment
The first step our subscriber needs to take is to identify the expenditure which counts as capital and that which does not. This determines whether a tax deduction can be claimed against rental income, capital gains or sometimes not at all.
TRAP 1:
The first-time cost of providing furnishings and equipment for use by tenants of a residential property is not a tax-deductible expense. However, a deduction will be allowed for the cost of replacement items in the future.
TIP:
A way to mitigate Trap 1 is to let the property with equipment and furnishings you acquired when you bought the property (it’s a good idea to have the sale/purchase contract list the items). These are likely to cost very little. That way what you spend on replacing them, which you can do soon after the property is on the market for letting (even before the tenant moves in), you’re entitled to a tax deduction for.
Fixtures and fittings
HMRC’s approach to the cost of replacing boilers, water and light fittings etc. is that they are repairs to the building and therefore the cost of replacing them is usually tax deductible from rental income.
Structural improvements
Costs our subscriber incurred on improving or changing the structure of the properties, e.g. knocking down walls, converting lofts, is not tax deductible from rental income. Instead, it can be deducted when working out any capital gain or loss when the property is sold, as long as the improvement still exists at the time of sale.
Repairs and redecoration
Normally, the cost of repairs and redecoration is tax deductible from rental income. However, HMRC may think otherwise.
TRAP 2:
HMRC may argue that expenditure on repairs and redecoration that’s so significant it constitutes a repair needed to make the property fit for letting, is not tax deductible from rental income. Instead, it says that the same rules for structural improvements apply.
TIP:
Whether or not expenditure is caught by Trap 2 is subjective. Generally, HMRC should accept repairs and redecoration costs incurred before letting commences as tax deductible from rental income and we recommend claiming them as such. HMRC’s internal guidance on this topic is quite helpful on this point.
Conclusion
All expenditure apart from that on furnishings and equipment for use by the tenant qualifies for tax relief. Generally, expenditure on repairs and redecoration is tax deductible from rental income while that for structural improvements is deductible when calculating capital gains or losses when the property is sold.