Grant asks: “I’m looking to buy a house and rent out the house I currently own and live in. When I rent the property and fill in my first self-assessment form, what costs and expenses can I offset against profits and how far back can I go?”
Q&A 72 – Expenses I Offset Against Property Profits – Shownotes
Today’s question is the first of two that Grant sent me via email. They are both crackers, but are both pretty complex, so these next two episodes will be longer than the average Q&A podcasts. So, I better get cracking. Grant asks:
I am looking to buy a house with my girlfriend and rent out the house we currently live in, that I own. We have lived here for five years and have carried out ‘maintenance’ on the property regularly. We have not made substantial improvements to the property, i.e. No extensions or layout charges but more decoration, carpets, wall tiles etc. I have fitted a new bathroom suite.
In knowing I could afford to keep the house when we moved I have also been buying books and educational material in order to understand the letting process.
When I rent the property and come to fill in my first self-assessment form, what costs and expenses can I offset against the profits in regard to the above and how far back can I go?
What Are Taxable Profits For Property?
Right, let’s start with the obvious. When you are renting out a property, your taxable income is calculated as being the following:
Less: Allowable Expenses
Easy right? Yeah, as if tax is ever easy. Allowable expenses unfortunately comes with lots of specific definitions. Let’s run down them in the order that they are presented on the HMRC website.
Firstly they offer an overall definition being: “things (always a good general word, isn’t it?!), things you need to spend money on in the day-to-day running of the property”.
The only thing we can take from this is that, as Grant highlights in his question, capital improvements do not count as allowable expenses. Therefore, if you built a loft extension or a conservatory, this wouldn’t be an allowable expense.
Right, let’s run down their list of suggestions of some things that may be allowable expenses:
- Letting agents’ fees
- legal fees for lets of a year or less, or for renewing a lease for less than 50 years
- accountants’ fees
- buildings and contents insurance
- interest on property loans
- utility bills, like gas, water and electricity
- rent, ground rent, service charges
- Council Tax
- services you pay for, like cleaning or gardening
- other direct costs of letting the property, like phone calls, stationery and advertising
What Are Repairs vs Capital Expenditure?
All pretty easy – however, I’ve missed a BIG one off the list: maintenance and repairs to the property (but not improvements). This is so complex that there is a whole paper on the HMRC website on it: PIM2020.
Let’s look at some key passages from this manual:
“Repair means the restoration of an asset by replacing subsidiary parts of the whole asset. An example is the cost of replacing roof tiles blown off by a storm. There won’t be a repair if a significant improvement of the asset beyond its original condition results – that will be capital expenditure. For instance, there will be a capital improvement if the taxpayer takes off the roof and builds on another storey. “
Examples of common repairs that are normally deductible in computing rental business profits include:
- exterior and interior painting and decorating,
- stone cleaning,
- damp and rot treatment,
- mending broken windows, doors, furniture and machines such as cookers or lifts,
- re-pointing, and
- replacing roof slates, flashing and gutters.
What’s Been Missed Off The List?
There’s also some things here which are missed off the list, but which are generally accepted as being allowable expenses.
For example, motor expenses are allowable from your home to destination (assuming you run your property rental business from home). This covers the cost of visiting Letting Agents, accountants, solicitors, checking on existing properties etc.
Other reasonable travel costs including train, bus, air and taxi fares can be claimed. Hotel and meal costs can be claimed if an over-night stay is needed (assuming the trip is for business purposes).
However, none of these costs are allowable for viewing potential property purchases. Annoying!
Another area is training costs. Grant refers to this in his question by saying: “In knowing I could afford to keep the house when we moved I have also been buying books and educational material in order to understand the letting process.”
This is a bit of a blurred line. Generally, seminars, courses and books that are directly relevant to a property rental business are allowable expenses. However, training costs to develop new skills are treated as intangible capital assets – and so are not revenue costs, nor are capital allowances available.
So, for your books and educational material directly related to the letting process, you should be okay, but it may be worth consulting with an accountant.
What About The Timing Of Expenses?
Before we wrap up, let’s go back to Grant’s question. He’s basically asking if costs that have been incurred whilst he’s been living in the property for the past five years could be included as allowable expenses against the rental income when it’s received. I’m afraid not, Grant. Expenses can generally only be offset against the period related to the rental income. This will work on a personal tax year (ending April 5th each year). Therefore, if you rent out the property in the 2015/16 tax year, some expenses (such as a property rental book you bought in May 2015) could be deducted, but a repair which had no relevance to the rental in the same month probably could not.
With all things tax wise, most people don’t think like this, but I find it’s best to try and determine what is “fair”. If you can reasonably and honestly argue why you think something should be a deduction, it probably will be. However, if you can’t convince yourself, you’ll definitely not be able to convince the tax man!
If you want another point of view here Grant, I would recommend (as I often do for subjects related to property) checking out The Property Hub, and the free training course that they offer (in conjunction with tax specialist Iain Wallis) called “Buy To Let Tax Basics”.
Well, if that wasn’t a tough enough question from Grant, he’s asked another one which we’ll answer on Monday regarding equivalent salaries for the employed and self-employed. So, get some rest this weekend before that on Monday because it’s a bit of a brain twister! See you then!
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