What expenses can landlords claim to reduce their tax bills?

Mark Williams: Hello, and welcome to the third episode of a brand new podcast called Tax Tea Break with GoSimpleTax. It's a six part podcast series where I'll be speaking to tax and Self Assessment experts who offer free, time and money saving tax tips, for sole traders, private landlords, and others who pay tax by a Self Assessment.

My name is Mark Williams, and I'm your host. Hopefully, you've made yourself a nice cuppa. Now each 20 minute episode has its own subject, and in this, our third episode, we'll be talking about expenses that you can claim if you're a private residential landlord who pays UK tax. The UK is now thought to have about 2.6 million private landlords.

Whether you are new to renting your property or you've been doing it for a while, you may not be totally sure about what expenses you can claim, which means you might be missing out. And although renting our property can offer excellent returns, it involves having to pay many expenses. Claiming for these are allowable via your annual Self Assessment tax return reduces your tax bill.

So you really should find out what you can claim for. Stick around to find out. Before I introduce today's guest expert, let's find out about Go Simple Tax and how it could benefit you if you pay tax by Self Assessment

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Mark Williams: It's time now to introduce our expert, Aiden Corcoran, who is a personal tax senior at Go Simple Tax, and he has worked as an accountant and tax advisor for more than 10 years.

Aiden has plenty of experience of Self Assessment tax returns, and the expenses that private landlords can claim via Self Assessment. Aiden, welcome.

Aiden Corcoran: Hi. Hi, Mark, you're right?

Mark Williams: Thanks for joining us. Okay. Now

with costs increasing across the board for landlords just as much as the rest of us, how important is it to claim all of your allowable expenses if you're a landlord?

Aiden Corcoran: I'd say it's very important, to be honest. Obviously, money's tight at the moment and anything that you can claim, you should claim. In my experience, people do look around online to see what can be claimed and what can't but there is some hesitation in what some, sometimes people do claim. So I'd say it's more important now than ever really to um, make sure that you are claiming everything that is a allowable.

Mark Williams: Yeah. Cause the more that you claim, the lower your, your tax tax bill essentially, when it, when it gets assessed by HMRC.

Aiden Corcoran: Exactly, yes. It'll reduce the, um, profit and therefore less tax.

Mark Williams: Great. Okay. And then just to make the point, allowable expenses, a cost that HMRC allows landlords to deduct to lower their annual tax bill, but it remains true that many landlords don't claim all of their allowable expenses. But why does this happen? Is it just lack of awareness? They simply just don't know that some of the costs can be claimed as allowable expense?

Aiden Corcoran: There's that, and it's also, I'd say people being unorganised. I obviously, I've been in practice while I was in practice, uh, for near of 10. And I'd say that people leave things till the last minute.

They've got no plan in place throughout the year, and when it comes to, let's say January, and they're just trying to get as much as possible, they're gonna forget about all their expenses and therefore not claim everything. And obviously that will mean that the tax bill's gonna be more because you've not claimed everything that you should be claiming.

Mark Williams: Indeed. Okay. So it's poor expense management as well. So landlords just, just simply forget about certain expenses that they could have claimed and they just fail to do so.

Aiden Corcoran: Yeah, exactly that again, that's being unorganized, isn't it? I'd say that if people are incurring expenses on their residential properties, um, that let it out, then why don't they start keeping records electronically, so then they've got some sort of record to go to during the year. When they come to do the tax return.

Mark Williams: Indeed. Okay. And, and for an expense to be allowable for tax purposes, it must result wholly and exclusively from renting out your property. You can't claim for personal costs. But what happens, say in the instance where there's mixed usage, say for example, a mobile phone.

Some of your calls are for personal reasons, but other ones are linked to renting out your property, where you, where you are ringing your tenants, for example.

Aiden Corcoran: Yeah. So, um, in terms of expenses where they've got mixed use, for example, then you would have a look at what element, um, relates to the business in this instance, the, um, property business, and therefore disallow the personal element of it.

So, in your example, their mobile. If you are calling some tenants and you've got a fairly large property portfolio, and let's say 50% of your time on your phone is spent calling clients and dealing with repairs, et cetera, then you could include 50% of the costs of your mobile phone against the rental income.

Mark Williams: So it's about working out the proportion, and it's gonna be different for different types of landlords. As you say, landlords, with the bigger portfolio, they're likely to be making more calls to do with the rental income and others for example, if they, they're only lending, renting out one property, then obviously they're gonna be using their mobile phone for the rental business much less frequently.

Aiden Corcoran: Yes, exactly. And also if they've got letting agents, if you've got a letting agent, then the only calls that you'd really be doing is probably once a month with the letting agent or if you're confirming for certain expenses to go out. Whereas if you're managing it yourself, then there's obviously gonna be more or more business element to the costs.

Mark Williams: Okay, though some allowable expenses are more obvious than others. For example, council tax, water rates, gas and electricity. If you're a landlord who pays those. These can all be allowable expenses. Obviously, you can't claim for those if the tenant is paying for their own electricity and gas bills.

Aiden Corcoran: No, you can't. If you've got a tenant who is paying any of the standard living bills, then they won't be allowable because it's not money out of your pocket, so to say.

Mark Williams: Indeed. Okay. And allowable expenses can include ground rents, service charges, as well as lettings agents and property management fees. What about insurances? Can that be an allowable expense?

Aiden Corcoran: Yeah, insurance is an allowable expense, um, under the different types of insurance are as well. So if you've got a building insurance, if you've got the belongings inside the home as well.

Mark Williams: Content?

Aiden Corcoran: yeah. Content, sorry. Yeah, that's, um, that's an allowable expense as well.

Mark Williams: And, and, and then what about mortgage interest? As I understand it, before 2017, these were allowable expenses, but not anymore. How, how do you claim for those now?

Aiden Corcoran: Yeah, so mortgage interest is a funny one to be honest. Um, they obviously had the taper period whereby you could claim a hundred. Against your income. And then they tip it out at 25%, 50%, 75, and a hundred percent not allowable.

Um, instead it is now considered tax credit against basic great, um, tax, and that I believe is section 24 is the actual legislation that it came into.

Mark Williams: Okay, so landlords now get tax credit of, of 20% as opposed to under the previous system when the, when it could be claimed as allowable expense.

Aiden Corcoran: Yes. So, it is basically limited to the 20%, um, in the basic rate band. So, for example, if you have, um, if you're a higher rate taxpayer, and you have rental income whereby you pay 40%, you are actually limited just to the 20% tax credit for any rental profits that you may have that are taxable.

Mark Williams: Yeah, it's still worthwhile, um, credit, you know, it's still quite a valuable thing.

Aiden Corcoran: Oh, a hundred percent. Yeah. Again, it's reducing your tax bill and given what's going on in the world at the moment, um, it's definitely worthwhile.

Mark Williams: And obviously gardening and end of tenancy cleaning costs are allowable. What about legal fees? For example, if a landlord needs to hire a solicitor, can those be allowable?

Aiden Corcoran: Yes. So, it'll completely depend on the legal fees and what the reasoning is for. Again, it links in with what we said before about wholly in exclusively. Um, if it's wholly in exclusively for the purpose of the business. So let's say for example, you have a tenant where you've got a rent, uh, dispute, then because that is relevant directly to the business, and therefore

directly relevant to the profit and loss account. It'll be a deductible expense in there. If, however, you are hiring a solicitor to sell the property and that would be considered capital. And it's not for holding, it's for the purpose of the business. And instead, you would look at that when you come to sell the property instead of the profit and loss.

Mark Williams: Accountancy fees are allowable. What about accounting and, and tax returns software? A lot of the landlords now are now using those to complete and file their tax returns. Can they be allowable expenses?

Aiden Corcoran: Unfortunately, not. HMRC have, um, a little bit of a quirky rule. And basically, if you are paying for software that calculates a tax liability, that is not considered allowable in terms of the property business.

The only reason that you would have the accountancy fees allowable is if you were getting, um, sets of accounts basically built by the accountant.

Mark Williams: And some landlords may not realise that they can claim for advertising their property to attract new, new tenants or for removal costs when disposing of old items of furniture, electrical appliances.

Aiden Corcoran: Yeah, they are allowable again cuz it's directly relevant to the business. And therefore, if anybody does incur such costs, then they should definitely allow. Especially, um, if you have a letting agent, um, no doubt they'll be charging you some sort of tenancy finder fee and that would be allowable because they're basically trying to find.

Somebody to pay, um, your money for the rent, basically.

Mark Williams: Yeah. And just to make the point, when we're talking about claiming allowable expenses, what you do is you summarise those in your tax return at the end of the year, all of your sort of property, renting out the property, all the costs associated with that.

That you can claim for. You summarize those, you put them into your tax return and that's how you claim that comes off your profit and that reduces your, your tax liability.

Aiden Corcoran: Yeah. In a nutshell, yes. You'll basically record your income on your tax return. And then a little bit further down on the tax return form, you'll have your section for expenditure, allowable expenditure, basically following that whole and exclusively rule that we mentioned a couple of times.

And then if, depending on what, um, sort of. Business you start do or what, um, role you have in that business. If you, let's say for example, do go and visit the houses, then you may have capital allowances for your car.

Mark Williams: Landlords can also main, uh, claim for maintaining a rental property and redecorate and is a, is a common example while repairs are also allowable.

For example, say fixing a broken window or replacing a roof tile. But what about when it comes to replacing a more valuable item such as a bathroom? A wash basin or a toilet, as I understand it, you can't claim full allowable expenses if the replacement is of a higher value than the original item.

Aiden Corcoran: Yeah. So, um, in terms of that, there's a little saying, and it's called like for like, and that basically means that if you are replacing something, then it needs to be like for like in terms of materials, um, quality. Et cetera. And if it is like for like, then usually you can claim and for it. There's also sometimes a lot of quirky rules.

So, for example, double glazing, if you're replacing, um, single glazing and it is basically upgraded inverted coms to double glazing because the double glazing is now seen as a standard, that actually isn't an improvement. That is just considered a repair in this day and age.

Mark Williams: So, the point being that you, you.

Add things to the property that, that increase the value of the property. You could, you, you, as you say, you're supposed to replace things like for like.

Aiden Corcoran: Yes. If you were to have a, let's say a cheap bathroom suite or um, kitchen appliances, then you'd need to replace them with equivalent cost and you can't then go and upgrade to all the premium stuff and get that as an allowable expense.

Mark Williams: What if I decide to add an extension to the property or convert the loft or, or fit a security alarm? Are those claimable as a, an allowable expense?

Aiden Corcoran: They are not claimable as an allowable expense within the profit and loss account as when you look at them. Um, they actually add value to the property.

Usually, um, extension a hundred percent adds value to the property. Um, and therefore that would be considered a capital improvement. But you will then be able to claim these when you come to sell the property later down the line. So it's not all lost, but um, you just have to delay, um, how long it takes to get that, uh, tax release basically.

Mark Williams: Yeah. And that's, that can be offset against capital gains tax as I understand it. Yeah?

Aiden Corcoran: Yeah. So effectively you'll have, you would've purchased your property at x date. Um, you sell it at y date, and you'll basically take your proceeds, take off, your original cost, take off, um, any capital improvements during the ownership. And then, um, it'll come down to what your game would be for that property.

Mark Williams: I understand. Okay. And what are the tax rules then, uh, when it comes to replacing furnishings or equipment, uh, in a, in a furnished or part furnished property, how may these costs be claimed?

Aiden Corcoran: There was the introduction of something called the replacement of domestic items relief.

Which effectively covers all your white goods. And so for example, you've got your fridges, your washing machines, dishwasher, you've got, and then you've also got like sofas, beds, carpets, its curtains, all that sort of stuff. Basically, if you are replacing those, then they come under the replacement for domestic items relief. Section on the tax return.

Mark Williams: They can't be claimed as allowable expenses. There are separate provisions for those things.

Aiden Corcoran: Yeah, they're, they're effectively an allowable expense, but they don't go into the LP L account. They'll go into a separate box, box out a little bit later on the tax return.

Mark Williams: Fantastic.

Excellent stuff. All that remains is for me, so thank you, Aiden, for being a great guest and for sharing your knowledge.

Aiden Corcoran: No, thank you again.

Mark Williams: There we have it. So, what are the three key takeaways from this episode? Well, firstly, you can claim allowable expenses for many costs. You must pay to rent out your property. Secondly, claiming them reduces your taxable profits, which lowers your tax bill so it can save you a lot of money. Thirdly, although you can claim for maintenance and repairs, you can't claim for capital improvements.

For example, flooring a loft or adding an extension, although you may be able to offset such costs against capital gains tax if you later sell the property. Hopefully this episode has given you a greater understanding of allowable expenses for landlords, but you can also head over to the Go Simple Tax website, which is gosimpletax.com.

For more free guidance on allowable expenses and many other tax related topics, our next episode will be packed with free advice on how to avoid common mistakes when completing and filing your Self Assessment tax return. It's a cracking episode, so don't miss it. We really hope that you've enjoyed this episode and that you've learned lots of useful things.

Please tell others about the podcast and followers and like and share our social media posts because we really do want to help as many sole traders, private landlords, and expats as possible. Thanks for listening. Until next time.