Which Allowable Expenses Do Buy-to-Let Landlords Fail to Claim?
Renting out a property can be extremely rewarding, but it can also cost a lot of money, especially initially.
Luckily, a lot of expenses can be claimed as allowable expenses, which Buy-to-Let (BTL) landlords can deduct from their profits and so decrease their taxable income, minimising their tax bill.
Many BTL property investors invest in property as an additional income or business and yet fail to keep a proper record of their expenses.
This can leave them overpaying on income tax either in their self-assessment or in their company accounts.
Here are the 3 major problems we have identified with BTL accounting:
Losing receipts
Thinking costs are too insignificant to bother with, but when you start adding them together, it makes a significant difference
Lack of knowledge or fear of breaking the rules
An easy solution to the problems above is to take photos of receipts that you have in your wallet that are valid property expenses and send them to your email. This way you have a copy of the receipt electronically.
It’s even better if you put a description in the email and save the email in a folder. If you are uncertain about expenses, keep the receipt and proof, and ask us or research it when you have time - if in doubt, don’t throw it out!
We have also seen clients open a separate bank account and pay all property expenses from that bank account or use savings points in their bank account.
A lot of digital banks allow you now to make notes on transactions as they go through the bank. This is also a very good way of keeping track of your expenses.
What are allowance expenses?
For an expense to be deductible for tax purposes, the expense must be incurred wholly and exclusively to generate an income or to practise a trade, in this case, renting out a property.
Therefore, the key factors are the nature of the expense but also the purpose of the expense incurred.
A good example of an ineligible expense would be a microwave; you can use the microwave in a property that you rent out, but the microwave was not bought wholly and exclusively to generate rental income for a long-term property rental.
Some expenses are more obvious than others for example:
Council tax for the property that they rent out
Gas and Electricity for that property that they rent out
Landlord Insurance, Public Liability, and content insurance
Electrical certificates
Property management or letting fees
Property Maintenance
For BTL property investors that invest in their own name and not through a company, Section 24 now removes the property owners’ right to deduct the full finance costs (if interest only, the full mortgage amount) from their rental income before calculating their tax liability.
Now they get 20% of the total mortgage amount as a deduction through their self-assessment. If the property was bought in a company name, the full finance amount is allowable as a deduction.
Expenses that landlords can claim that are often overlooked:
Accountants’ fees to maintain their accounting records.
Legal fees for pursuing a tenant.
Maintenance work – some property owners do maintenance on their own because they want to save money, which means that they can’t claim for their own time fixing or doing maintenance.
Telephone calls that relate to renting out the property.
Vehicle mileage if they must travel to and from the property or journeys that relate to that property.
Advertising the property to attract new tenants.
Small costs, i.e., stationery costs, can be claimed if the expenses were incurred in the production of income.
Waste removal costs.
Property Maintenance, Repairs, and Improvements
A landlord can claim maintenance and repair expenses that relate to the rental property to ensure it remains in the condition that it is, i.e., not to make improvements.
Examples:
Redecorating a property between tenants
Fixing a broken window
Mending a garden fence
Replacing baths, basins, and toilets – only if like for like as this is classed as building repairs
If the landlord claims their insurance, they cannot also get the full expense as a deduction. The difference between the expense and the income, however, can be deducted.
Note: Capital expenses are not allowable for tax deduction but can be included in the cost of the property and will decrease your capital gains tax liability in the future. Keep a record of all your capital expenses and be sure to include them in your future tax returns.
If your property is fully or partly furnished, and you need to replace things like beds, carpets or curtains, then you may use the replacement of domestic items relief.
Generally, BTL landlords can’t deduct these items as a tax deduction but with this relief, they can replace an item with an item of comparable value (not better quality or higher value, as this would constitute an improvement)
We always recommend property owners do the following to make life easier for themselves:
Open a separate bank account and only use this account for your property-related expenses and income. This will help you isolate your property business from your personal finances.
Keep records of all your expenses. Scan/take photos of your expenses and save these on your phone or computer in a separate folder.
You mustn’t assume that you will remember what suppliers you used, or expenses you incurred a year later, much less five years later. Use technology to make your life easier!
We at Anlo hope this article has helped you. If you want to find out more or have questions we’ve not answered here, why not contact us and book a 15-minute meeting or send us an email at annja@anlofin.com