Landlords could be in line for further tax reliefs to make improvements to their properties following a recent Parliamentary committee recommendation. Our landlord and tenant specialist, Joy Hancock explains what tax reliefs are currently available to landlords.
What are the allowable expenses a residential landlord can claim?
The most common types of expenses you can claim are:
- General maintenance and repairs to the property, but not improvements (such as replacing a laminate kitchen worktop with a more costly granite worktop)
- Expenses for the interest on a buy to let mortgage to buy the property
- Water rates, council tax, gas and electricity
- Insurance, such as landlords’ policies for buildings, contents and public liability
- Costs of services, including the wages of gardeners and cleaners
- Letting agent fees and management fees
- Legal fees for lets of a year or less, or for renewing a lease for less than 50 years
- Accountant’s fees
- rents (if you’re sub-letting), ground rents and service charges
- Direct costs such as phone calls, stationery and advertising for new tenants
- Vehicle running costs (only the proportion used for your rental business) including mileage rate deductions for business motoring costs
You can also claim for part-expenses provided a definite part of a cost is incurred wholly for the property business meaning you can deduct that part. For example, if a property is used for private purposes by the owner for three months of the year and let as a residential property for nine months, then 9/12 of the mortgage interest can be deducted from the rental income.
Can a residential landlord claim for mileage expenses travelling to and from their properties?
Landlords can claim for journeys relating to the rental property, such as, trips to the property, agents or shops to buy something relating to the rental.
According to gov.uk if you run an unincorporated property business as an individual or in a partnership which is made up of only individuals, you can calculate your car, van or motorcycles expenses using a flat rate for the mileage travelled in connection with your rental properties. This is 45p per mile for cars and goods vehicles up to 10,000 business miles then 25p per mile thereafter.
Can a residential landlord claim back a mortgage payment for tax purposes?
Only the interest part of the mortgage payment can be treated as an expense when working out your rental profit or loss for tax purposes. If you have a repayment mortgage, the capital repayment part of any payments isn’t an allowable deduction. This means that the mortgage interest may be less than the full monthly payment you make, as your mortgage repayments may include repayment of capital. Your mortgage provider will usually send you a mortgage statement each year. You can use this statement to work out how much mortgage interest you can claim as an expense when working out your rental profit for the year.
Can a residential landlord claim maintenance and repairs as an allowable expense?
Ongoing repairs to the fabric and structure of a rental property are expenses which can be deducted from your rental income. Examples would include exterior and interior painting and decorating, damp and rot treatment, mending broken windows, doors or furniture or replacing roof slates, flashing and gutters. However, initial capital costs to bring a rental property up to scratch before letting are not tax deductible, though may be set against Capital Gains Tax when the property is sold.
Is adding an extension to a rental home property tax deductible?
While ‘day-to-day’ running costs are classed as allowable, major works which add to the property, improve or upgrade it are classed as ‘capital expenses’ so cannot be claimed within your tax return. This could even include something as simple as upgrading a kitchen worktop from the existing to a more expensive material such as marble. However, it is important to keep records of such expenses as these can be set against Capital Gains Tax when you sell the property. Capital Gains Tax is the tax which is payable on the profit made on the disposal of an asset, in this case a property.
How much tax should a residential landlord pay on their rental income?
When you let a property to a tenant, you pay tax on any profit you make from rental income that is not covered by your personal allowance, which is set at £12,500 for the 2019-2020 tax year. The amount of tax that you pay depends on which tax band you fall into. It also includes any payments you get from tenants for the use of furniture and charges for additional services (such as cleaning of communal areas, hot water, heating and repairs). If you earn £15,000 from renting out your property, for example, the first £12,500 is tax-free, so you will only pay 20% tax on the remaining £2,500, which comes to £500.
Is there any tax relief for the replacement of furnishings such as beds and carpets?
While the former 10 per cent wear-and-tear allowance has gone, you can claim “replacement of domestic items relief” if you genuinely replace items such as beds or curtains. Replacements must be like-for-like, and you can also claim for the cost of disposing of items and this relief is available in all rental properties, not just those which are fully furnished.
Future recommendations following the recent House of Lords’ Committee Report
It is worth a mention that following the recent House of Lords’ Committee Report, that tax incentives are being proposed to residential landlords who improve the standard or quality of their rental properties. Whilst the main objective of this report is to assist in the regeneration of seaside towns and communities, it is hoped to assist residential landlords elsewhere who undertake improvement works. Whilst the finer detail is yet to follow, it is something to keep and eye out for. The Resident Landlords’ Association hope that such proposals will in particular assist in improving energy performance ratings generally by encouraging such improvements.