In this article, you will gain a comprehensive understanding of the various buy to let allowable expenses. As a buy to let landlord, it is crucial to grasp the expenses that can be claimed against your rental income, ensuring that you make the correct financial decisions. By exploring the range of allowable expenses available to you, this article aims to equip you with the knowledge needed to maximize your returns and effectively manage your buy to let investments.
Mortgage Interest
Definition of Mortgage Interest
Mortgage interest refers to the interest paid on the loan taken out to purchase a buy-to-let property. It is an essential expense for landlords as it is the cost of borrowing money to finance the property investment. The interest payments can add up significantly over the course of a mortgage, and they are generally tax-deductible.
Restrictions on Deductibility
While mortgage interest is usually a buy to let allowable expenses, there are certain restrictions that apply. In 2017, the government introduced changes to the tax relief on mortgage interest for landlords. These changes have been phased in over a period of four years, with the full effect coming into place in April 2020.
The new rules limit the amount of mortgage interest that landlords can deduct from their rental income when calculating their tax liability. Instead of deducting the full amount of mortgage interest, landlords are now subject to a reduction in the allowable deduction to the basic rate of tax.
Mixed Use Properties
In the case of mixed-use properties, where part of the property is used for residential purposes and part is used for non-residential purposes, such as a home office, the deductibility of mortgage interest is subject to further restrictions. The proportion of mortgage interest that can be claimed as a deduction will depend on the ratio of residential to non-residential usage.
Landlords should consult with a tax professional or accountant to ensure they correctly calculate the deductible portion of mortgage interest for mixed-use properties.
Changes in 2017
The changes introduced in 2017 have had a significant impact on the taxation of mortgage interest for landlords. It has resulted in a higher tax liability for some landlords who previously relied on the full deduction of mortgage interest to offset their rental income.
Landlords should carefully consider the financial implications of these changes and plan accordingly. This may involve reviewing the profitability of their property portfolio, reassessing rental income levels, or exploring other tax-efficient structures for property ownership.
Qualifying Loans
It is important to note that for mortgage interest to be a buy to let allowable expenses, it must be incurred on loans used to acquire, improve, or repair a buy-to-let property. This means that if the loan is used for personal purposes or to finance non-rental properties, the interest may not be eligible for tax relief.
Landlords should ensure they keep accurate records of mortgage interest payments and consult with a tax professional to determine which loans qualify as buy to let allowable expenses.
Property Maintenance and Repair
Definition of Maintenance and Repair
Maintenance and repair expenses are the costs incurred to keep a buy-to-let property in a good state of repair and to rectify any damage or wear and tear that occurs during its use. These expenses are considered necessary for the continued functioning and preservation of the property and are therefore allowable as tax deductions.
Difference between Capital and Revenue Expenses
It is important to distinguish between capital and revenue expenses when it comes to maintenance and repair costs. Capital expenses are those incurred to improve or enhance the property, such as major renovations or structural changes. Revenue expenses, on the other hand, are those incurred to keep the property in good working order, such as fixing plumbing issues or repainting walls.
While capital expenses are not immediately deductible, they may be eligible for tax relief over a longer period through capital allowances. Revenue expenses, on the other hand, can typically be deducted in the year they are incurred.
Examples of Allowable Maintenance and Repair Expenses
Allowable maintenance and repair expenses include a wide range of costs associated with the upkeep of a buy-to-let property. Examples of such expenses may include:
- Plumbing and electrical repairs
- Painting and decorating
- General maintenance and servicing of appliances
- Cleaning and gardening services
- Pest control
- Replacement of broken windows or doors
- Repairing or replacing roof tiles
Landlords should keep detailed records of these expenses, including invoices and receipts, to support their tax deductions as buy to let allowable expenses.
Renovation and Improvement Costs
While maintenance and repair expenses are generally tax-deductible, the same cannot be said for costs associated with major renovations, improvements, or alterations to the property. These types of expenses are considered capital in nature and are not immediately deductible.
However, they may qualify for tax relief through capital allowances, which allow landlords to claim a portion of the cost over several years. It is essential to consult with a tax professional to understand the specific rules and guidelines regarding capital allowances for renovation and improvement costs.
Letting Agent Fees
General Overview
Letting agent fees are expenses incurred when engaging the services of a letting agent to manage a buy-to-let property. These fees are typically paid by landlords to the letting agent for services such as tenant sourcing, tenancy agreements, rent collection, and property management.
Letting agent fees can be a valuable investment for landlords, saving them time and effort in managing their properties. These fees are generally considered allowable expenses and can be deducted from rental income for tax purposes.
Advertising and Marketing Fees
One of the main services provided by letting agents is advertising and marketing the rental property to attract potential tenants. This includes listing the property on various online platforms and classifieds, as well as creating attractive advertisements to generate interest.
The fees associated with advertising and marketing the property are considered allowable expenses and can be deducted from rental income. Landlords should keep records of these fees, including invoices and receipts, to substantiate their tax deductions.
Tenant Find and Tenant Management Fees
In addition to advertising and marketing, letting agents often charge fees for tenant find services, which involve sourcing and vetting potential tenants. These fees are typically calculated as a percentage of the rental income and are payable when a new tenancy is agreed upon.
Tenant management fees, on the other hand, are charged for ongoing property management and maintenance services. These fees cover tasks such as rent collection, property inspections, and handling tenant complaints or repairs.
Both tenant find and tenant management fees are allowable expenses and can be deducted from rental income for tax purposes.
Other Landlord Services
Letting agents may also offer additional services beyond tenant find and management. These services may include inventory checks, renewal of tenancy agreements, handling of deposit protection schemes, and legal compliance assistance.
The fees associated with these services are generally considered allowable expenses and can be deducted from rental income for tax purposes. It is important to keep accurate records of these fees and consult a tax professional if any uncertainties arise.
Insurance
Buildings Insurance
Buildings insurance is a crucial expense for landlords as it provides financial protection in the event of damage to the structure of the buy-to-let property. Buildings insurance typically covers risks such as fire, storm damage, flooding, and vandalism.
The cost of buildings insurance is considered an allowable expense and can be deducted from rental income for tax purposes. Landlords should ensure they have appropriate and adequate buildings insurance coverage to protect their investment.
Contents Insurance
Contents insurance covers the landlord’s personal belongings within the buy-to-let property, such as furniture, appliances, and carpets. This type of insurance is not mandatory for landlords, but it is strongly recommended to protect their assets.
The cost of contents insurance is an allowable expense and can be deducted from rental income for tax purposes. Landlords should consider the value of their contents and obtain appropriate insurance coverage based on their needs.
Rent Guarantee Insurance
Rent guarantee insurance is an additional type of coverage that landlords can opt for to protect themselves against the risk of tenants failing to pay rent. This insurance typically covers any unpaid rent, as well as legal expenses incurred in evicting non-compliant tenants.
The cost of rent guarantee insurance is generally considered an allowable expense and can be deducted from rental income for tax purposes. Landlords should carefully review the terms and conditions of the insurance policy to ensure they understand the coverage and any limitations that may apply.
Legal Expenses Insurance
Legal expenses insurance provides coverage for legal costs incurred in certain situations, such as evicting non-paying tenants, pursuing damages for property damage, or defending against legal claims made by tenants.
The cost of legal expenses insurance is typically an allowable expense and can be deducted from rental income. Landlords should keep records of the insurance premiums paid and consult with a tax professional to ensure the deductions are correctly claimed.
Utilities
Gas, Electricity, and Water
Gas, electricity, and water are basic utilities that are essential for the functioning of a buy-to-let property. These expenses cover the costs of providing these utilities to the property, and they are typically the responsibility of the tenant.
However, in certain cases, landlords may include the cost of utilities in the rent, either fully or partially. In such cases, the portion of utilities paid by the landlord is considered an allowable expense and can be deducted from rental income for tax purposes.
Council Tax
Council tax is a local authority charge that is levied on residential properties to fund local services such as rubbish collection, street cleaning, and road maintenance. Generally, council tax is the responsibility of the tenant, and landlords are not responsible for paying it.
However, in certain circumstances where the landlord is responsible for council tax payment, such as in Houses in Multiple Occupation (HMOs) or when the property is vacant, the cost of council tax can be considered an allowable expense and can be deducted from rental income.
TV License
A TV license is a legal requirement in the UK for anyone who watches live TV or uses the BBC iPlayer. While TV licenses are typically the responsibility of the tenant, some landlords may provide a TV license as part of the rental package.
The cost of a TV license is generally considered an allowable expense and can be deducted from rental income for tax purposes if it is provided by the landlord.
Internet and Phone Services
Internet and phone services are becoming increasingly essential for tenants, both for personal use and for remote work or study. If the landlord provides internet and phone services as part of the rental package, the cost of these services can be considered an allowable expense and deducted from rental income.
Landlords should keep records of the expenses incurred for internet and phone services, including invoices or bills, to support their tax deductions.
Advertising and Marketing
Online Listings and Classifieds
Online listings and classifieds play a crucial role in advertising and promoting buy-to-let properties to potential tenants. Platforms such as property portals, real estate websites, and classified websites allow landlords to showcase their properties and attract interested parties.
The costs associated with online listings and classifieds, such as subscription fees or individual listing fees, are considered allowable expenses and can be deducted from rental income for tax purposes. Landlords should keep records of these expenses to support their tax deductions.
Promotional Materials
Promotional materials, such as brochures, flyers, signage, and business cards, can be effective tools for marketing buy-to-let properties. These materials help create awareness and attract potential tenants.
The expenses incurred in designing, printing, and distributing promotional materials are generally allowable expenses and can be deducted from rental income for tax purposes. Landlords should keep records of these expenses, including invoices and receipts.
Photography and Videography
High-quality photographs and videos are essential for showcasing the features and attractiveness of a buy-to-let property. Professional photography and videography services can help capture the property’s best angles and create visually appealing marketing materials.
The costs associated with hiring professional photographers or videographers are generally allowable expenses and can be deducted from rental income for tax purposes. Landlords should retain records of these expenses to support their tax deductions.
Signage
Signage, such as “To Let” or “For Rent” signs placed outside the property, can be an effective way to attract the attention of potential tenants passing by. These signs help create awareness and generate interest in the property.
The expenses incurred in designing, producing, and installing signage are generally allowable expenses and can be deducted from rental income for tax purposes. Landlords should maintain proper records of these expenses to support their tax deductions.
Ground Rent and Service Charges
Ground Rent
Ground rent is a regular payment made by the leaseholder to the freeholder for the use and occupation of the land on which the property is situated. It is often associated with leasehold properties, where the leaseholder does not own the land but has the right to occupy the property for a specified period of time.
The cost of ground rent is generally considered an allowable expense and can be deducted from rental income for tax purposes. Landlords should keep records of these payments, such as lease agreements or ground rent invoices, to support their tax deductions.
Service Charges
In leasehold properties, service charges are payments made by the leaseholder to cover the cost of maintaining and managing communal areas and shared facilities, such as gardens, lifts, or common areas. These charges are typically collected by the freeholder or a management company.
Service charges incurred by landlords are generally considered allowable expenses and can be deducted from rental income. It is important to retain records of service charge invoices and receipts to substantiate these deductions.
Leasehold vs. Freehold Properties
Leasehold properties are subject to specific rights and obligations outlined in the lease agreement, including the payment of ground rent and service charges. Freehold properties, on the other hand, are owned outright by the landlord, and there is no obligation to pay ground rent or service charges.
The cost of ground rent and service charges is an allowable expense for leasehold properties, while freehold properties do not incur these expenses. Landlords should accurately determine the type of property they own and keep proper records to support their tax deductions.
Apportionment of Expenses
In situations where a property is partially rented and partially used for personal purposes, such as a landlord’s own home office, the expenses related to the rental portion can be considered allowable expenses for tax purposes. However, accurate apportionment of these expenses is essential.
For example, if a property is 70% rented and 30% used for personal purposes, 70% of the ground rent and service charges can be claimed as allowable expenses. Landlords should consult with a tax professional or accountant to ensure they correctly apportion these expenses.
Accountancy and Legal Fees
Accountancy Fees
Accountancy fees are the charges for professional accounting services provided to landlords. These services may include bookkeeping, financial statement preparation, tax planning, and submission of tax returns.
Accountancy fees incurred by landlords are generally considered allowable expenses and can be deducted from rental income for tax purposes. It is important to keep records of the invoice or agreement with the accounting firm to support the tax deductions.
Legal Fees
Legal fees may be incurred by landlords for various purposes, such as drafting or reviewing tenancy agreements, pursuing eviction proceedings, or seeking legal advice on property-related matters.
Legal fees that are directly related to the buy-to-let property or its rental activities are generally considered allowable expenses and can be deducted from rental income for tax purposes. Landlords should retain records of the invoices or agreements with legal professionals to support their tax deductions.
Capital Allowances
Definition and Purpose
Capital allowances are tax reliefs provided by the government for the depreciation and wear and tear of assets used in the course of a business. In the context of buy-to-let properties, capital allowances allow landlords to deduct a portion of the cost of certain assets from their taxable rental income.
The purpose of capital allowances is to provide tax relief for the cost of acquiring and maintaining assets, promoting investment and supporting business growth.
Claiming Capital Allowances
To claim capital allowances, landlords must ascertain which assets qualify for relief and calculate the allowable deduction. Qualified assets may include items such as furniture, appliances, fixtures, and some integral features of the property, such as heating or electrical systems.
Landlords should seek professional advice from a tax specialist or accountant to ensure they correctly identify and claim the capital allowances to which they are entitled.
Writing Down Allowance
The Writing Down Allowance (WDA) is another type of capital allowance that applies to expenditure that exceeds the AIA limit or qualifies for relief at a lower rate. The WDA allows landlords to deduct a percentage of the cost of eligible assets from their taxable rental income each year.
The current rate for the WDA is 18% (as of tax year 2022/2023) of the remaining qualifying expenditure. It is important to note that once an asset has been claimed for the AIA or WDA, it cannot be separately claimed for other capital allowances.
Qualifying Expenditure
To claim capital allowances, the assets must meet certain criteria and be used solely for the purpose of the rental business. The costs incurred to acquire or improve qualifying assets are considered capital expenditure and may be eligible for relief.
Qualifying expenditure may include the purchase cost of furniture, appliances, fixtures, integral features, or other items directly related to the buy-to-let property. Landlords should retain records of the purchase and installation costs, as well as any documentation related to the assets, to support their capital allowance claims.
Travel Expenses
General Overview
Travel expenses incurred by landlords in relation to their buy-to-let properties may be allowable deductions for tax purposes. It is essential to understand the specific rules and guidelines regarding travel expenses to ensure compliance with tax regulations.
Transportation Costs
Transportation costs, such as fuel, parking fees, or public transportation expenses, incurred by landlords for business-related travel to their buy-to-let properties may be potentially deductible.
Landlords should keep accurate records of their travel expenses, including receipts or mileage logs, to support their deductions. It is important to note that commuting expenses from the landlord’s home to the rental property are generally not considered allowable deductions.
Accommodation Costs
If landlords incur accommodation expenses while traveling for business purposes, such as overnight stays near their buy-to-let properties, these costs may be deductible.
Landlords should retain records of their accommodation expenses, including receipts or hotel invoices, to substantiate their deductions. It is essential to remember that personal or non-business-related accommodation expenses are not considered allowable deductions.
Meals and Entertainment
Meals and entertainment expenses incurred by landlords during business-related travel may be eligible for tax relief. However, it is important to note that there are certain limitations and restrictions on deductibility.
In general, only a portion of the actual meal expense can be claimed as a deduction. It is recommended to consult with a tax professional to ensure compliance with the specific rules and limitations regarding meals and entertainment deductions.
In conclusion, understanding the allowable expenses for buy-to-let properties is crucial for landlords to manage their finances efficiently and maximize their tax deductions. From mortgage interest to maintenance and repair expenses, letting agent fees to insurance, utilities to advertising and marketing costs, ground rent to accountancy and legal fees, capital allowances to travel expenses, each category represents a significant aspect of a landlord’s financial responsibilities. By familiarizing themselves with the specific rules and guidelines for each expense category, landlords can ensure compliance with tax regulations, minimize their tax liability, and optimize the financial performance of their buy-to-let properties.