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Wednesday, 3 October 2012

Expenses and allowances on income from property

If you let out property you can deduct certain expenses and tax allowances from your rental income to work out your taxable profit or loss. If you have several UK residential lettings you pool the income and expenses together. But you work out furnished holiday lettings and overseas lettings profits separately.

Allowable expenses

The expenses you can deduct from letting income (unless it's under the Rent a Room scheme) include:

  • letting agent's fees
  • legal fees for lets of a year or less, or for renewing a lease for less than 50 years
  • accountant's fees
  • buildings and contents insurance
  • interest on property loans
  • maintenance and repairs to the property (but not improvements)
  • utility bills such as gas, water and electricity
  • rent, ground rent, service charges
  • Council Tax
  • services you pay for, such as cleaning or gardening
  • other direct costs of letting the property, such as phone calls, stationery and advertising

If your annual income from letting for the tax year 2011-12 is less than £70,000 (before expenses) you include the total expenses on your tax return. If it's £70,000 or over you need to provide a breakdown.

You can only claim expenses that are solely for running your property letting business. If the expense is only partly for running your business (or if you use the property yourself) then you may only be able to claim part of it.

Non-allowable expenses

When you work out your profit, you can't deduct:

  • 'capital' costs, such as furniture or the property itself
  • personal expenses - costs that aren't to do with your letting business
  • any loss you make when you sell the property

But you may be able to claim some allowances instead.

Allowances that can reduce your taxable profit

There are different types of allowance you may be able to claim for your capital costs. Capital costs include expenditure on assets such as furniture and machinery. The allowances you can claim for some of your capital costs vary according to the type of letting.

UK and overseas furnished residential lettings

For furniture and equipment provided with a furnished residential letting (excluding furnished holiday lettings) you can claim a 'wear and tear' allowance. The allowance is 10 per cent of 'net rent' - that is the rent received less any costs you pay that a tenant would usually pay - for example council tax.

As an alternative to the wear and tear allowance, you can claim a 'renewals' allowance. This covers the cost of replacing furniture or equipment, including small items like cutlery. To work it out, take the cost of the replacement item and deduct from it:

  • the amount you sold the old one for (if you got anything for it)
  • anything extra you paid for a better one

Once you've chosen which of these allowances to claim for a property, you can't switch between them from year to year. You cannot claim capital allowances for equipment that is used in a 'dwelling house'. Most residential accommodation is classed as a dwelling house - you can find out more by following the link below.

Furnished holiday lettings

If you own a qualifying furnished holiday letting in the UK or in the European Economic Area (EEA) you can claim 'capital allowances' based on the cost of the furniture and equipment you provide with the property. Or you can claim a renewals allowance (explained above). You can't claim wear and tear allowances.

Once you make a choice of the type of allowance to claim, you must keep to it.

To find out how capital allowances work see the section below: 'How much capital allowance can you claim?'

All letting properties

You cannot claim capital allowances for furniture and fixtures for use in a dwelling house if you have a property rental business unless it qualifies as a furnished holiday lettings business.

Whatever letting it is, you can claim a capital allowance on the cost of things that you need for running your property letting business, such as a computer. You can also claim for equipment that isn't for the use of a single let property, like a new fire alarm system for a block of flats.

How much capital allowance can you claim?

There are different types of allowances. In some cases you can claim the full cost of an item as a deduction in the year you buy it. In other cases you can claim all of your expenditure on various items in the year you buy them. You may have to work out the allowance as a percentage of the value in a pool of expenditure. The allowance is deducted along with other expenses in calculating your profits.

If you use an item for anything other than your business you'll have to work out the allowance for that item separately. You can then only claim the amount that is for business use. The links below give more information.

Which year do expenses belong to?

You have to allocate expenses to the year they apply to - it doesn't matter when you actually pay them. However, for capital allowances purposes it does matter when the cost of an item is payable. You may have to allocate part of an expense to one year and part to another.

Losses

If your letting business makes a loss, you can carry it forward to a later year and offset it against future profits from the same business. If it's a UK or EEA furnished holiday letting business you can offset your loss against all your income, not just your property income. This only applies for tax years up to and including 2009-10. For later years you can only offset your furnished holiday lettings losses against your furnished holiday lettings profits, of either your UK or EEA business as appropriate.

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