The simple answer is that expenses must be incurred ‘wholly and exclusively’ for business purposes. Expenses must also be ‘revenue expenditure’ to be claimed as an income tax deduction. This means that the expense is incurred on an ongoing basis in order to earn income (revenue).
Expenses that are not ‘revenue’ expenses are usually‘capital’ expenses (and so are deducted from the capital gain when the property is sold).
Interest and Finance Charges
Interest payable on business borrowings, including mortgages, loans, overdrafts, and credit cards. Interest is allowable on borrowings incurred for the purpose of the property rental business. Borrowings up to the value of the property when first rented out may be claimed. Interest on additional borrowings is allowable if used for business purposes.
Mortgage and loan arrangement fees are also allowable as are venue expense. It does not matter if the borrowing is secured or unsecured; it only matters if the funds were used for business purposes.
Motor and Travel Expenses
Motor expenses (45p per mile for the first 10,000 business miles, 25p per mile thereafter) from your home to the 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 trains, bus, air and taxi fares can be claimed. Hotel and meal costs can be claimed if an overnight stay is needed.
Repairs and Renewals
To be classed as a ‘revenue expense’ the repair or renewal must only restore the property to previous condition and not enhance the value of the property. Allowed as revenue costs is replacing single-glazed windows with double-glazed.
When completing refurbishment work that is a mixture of revenue and capital spending, it is worth asking the builder to invoice specific repairs (revenue item) separately to capital improvements (you will need to guide the builder on this). Also included are ‘incidental’ costs such as skip hire, general labour and clean-up costs etc (assuming the cost are revenue in nature).
Accounting, Book-keeping and Taxation Fees
Accountancy and tax advisory fee are fully-allowable expenses, as are general book-keeping fees.
Legal fees associated with tenancy matter and letting agent fees are allowable expenses. So too are legal fees specifically associated with arranging finance.
Insurance and Service Charges
Property insurance, including buildings insurance, rent insurance etc are all allowable expenses for landlords. Ground rents and service charges, and council tax, are also allowable.
Advertising and Marketing
All kinds of business advertising and marketing are allowable expenses, including newspapers, mail-shots, leaflets and website cost, provided that these relate specifically to a property rental business.
Generally, seminars, courses and books that are directly relevant to a property rental business are allowable expenses.
Other Business Expenses
A ‘provision’ may be allowable for income tax purposes before the expense has been paid. This applies if a legal obligation has been incurred, and the amount can be calculated with reasonable accuracy.
Telephone, Fax, Stationary & Other Office Costs
Technical books and publications relevant to a property rental business are allowable. Business land-line, mobile phones (a reasonable allocation may be used between private and business use), fax machine and internet cost are allowable.
Home office costs such as postage, stationary and printing and small computer equipment.
If you run your property rental business from y our home, you may claim a proportion of household bills as a business expense. (One fifth)
These are expenses that are incurred before a property rental business commences – but may still be claimed as allowable business expenses if they would normally qualified.
Such expenses can be claimed for up to seven years before the business commenced, and are treated as being incurred on ‘day 1’ of the property rental business commencing.
Arrangement fees are fully tax deductible against rental profits. Finance fees are not capital costs. Arrangement fees are almost always added onto the loan by the landlord, and the tax deduction is allowed when the expense is incurred.
When an investor buys a property initially with a mortgage, part of the solicitor bill relates to dealing with the purchase itself, and part relates to dealing with the lender and the mortgage.
However, it is only the latter element that is an allowable expense against the rental profits, and usually solicitors don’t split out their fees in this way.
Legal fees to remortgage a property are tax deductible against rental profits. So be sure to claim these costs along with the lenders fees in your rental accounts.
Employing Your Kids
Children receive an income tax Personal Allowance (2015 tax year of 10,000 per person) and income up to this limit is tax free. Therefore, paying children a wage can result in a one sided tax result, i.e., a tax deductible expense for the business, but NO tax bill arising on the income by the wage earner.
Bringing your children into the business at an early stage allows them to see the day to day reality of running a property business. It gives them a taste of self-employment which they may never experience, it may inspire them, teach them responsibility, learn them all aspects of being both a financial investor and a landlord.
Work children is permitted to do,
- Help with accounts, logging income and expenses
- Filling and general office admin
- Preparing paperwork
- Preparing properties for rentals, etc.
Age 13 – 15
- Work part-time
- Not before 7am and after 7pm
- Working in school hours not allowed
- Can’t work in factories or building site
- No national minimum wage
- No national insurance until the age of 16.
Age 15 – 17
- Children from the age of 16 can work full time – 40 hours
- National minimum wage of £3.79 per hour
- National insurance is payable if a child wages are £153 per week.
- Minimum wage is £5.13 per hour
- For payments of up to £5772 per year per person there is no need to operate a formal PAYE scheme. Most investors don’t need one, but it is important to keep proper records of hours worked, wage rate paid. Including wages paid to children in your accounts and tax returns become business expenses which could be scrutinised by HMRC.
- If you do operate a PAYE scheme you would add a new employee to the payroll and administer the wages in the usual way.
- Evidence of payment to the child, e.g. Monies paid into Childs bank account.
Your Property Network, Issue 37, July 2011