Tax deductions for new landlords

You have just completed your first year of a property rental business during which you spent a lot of money getting the properties ready for letting. You spent money on redecoration, repairs, structural work, fixtures, fittings and furnishings. How much of this expenditure is tax deductible?  Sam Scott from the Tax Team advises in this latest article.

The first step is to identify the expenditure which counts as capital and that which does not. This determines whether a tax deduction can be claimed against rental income, capital gains or sometimes not at all.

Furnishings and equipment
The first-time cost of providing furnishings and equipment for use by tenants of a residential property is not a tax-deductible expense. However, a deduction will be allowed for the cost of replacement items in the future.

A way to mitigate this is to let the property with equipment and furnishings you acquired when you bought the property. It’s a good idea to have the sale/purchase contract list the items. These are likely to cost very little. That way what you spend on replacing them, which you can do soon after the property is on the market for letting (even before the tenant moves in), you’re entitled to a tax deduction for.

Fixtures and fittings
HMRC’s approach to the cost of replacing boilers, water and light fittings etc. is that they are repairs to the building and therefore the cost of replacing them is usually tax deductible from rental income.

Structural improvements
Costs incurred on improving or changing the structure of a property e.g. knocking down walls, converting lofts, is not tax deductible from rental income. Instead, it can be deducted when working out any capital gain or loss when the property is sold, as long as the improvement still exists at the time of sale.

Repairs and redecoration
Normally, the cost of repairs and redecoration is tax deductible from rental income. However, HMRC may think otherwise.

HMRC may argue that expenditure on repairs and redecoration that’s so significant it constitutes a repair needed to make the property fit for letting, is not tax deductible from rental income, but rather constitute ‘improvements’ to the property and are therefore capital in nature.

Generally, HMRC should accept repairs and redecoration costs incurred before letting commences as tax deductible from rental income and we recommend claiming them as such.

IN SUMMARY
All expenditure apart from that on furnishings and equipment for use by the tenant qualifies for tax relief. Generally, expenditure on repairs and redecoration is tax deductible from rental income while that for structural improvements is deductible when calculating capital gains or losses when the property is sold.