Reclaiming tax on allowable expenses
Expenses can be offset against profits, reducing the amount of tax you’ll pay, therefore it’s well worth recording and claiming all legitimate expenses from running your property business. In this chapter we look at the difference between capital and revenue expenses.
Revenue vs Capital expenses
One thing we’re often asked about is whether a cost is classed as a capital expense or a revenue expense.
Capital expenses
A capital expense is a cost incurred to buy and upgrade the property. Capital expenses can be deducted from the gain (or added to the loss) when selling a property.
Revenue expenses
Revenue expenses are costs incurred as part of the day-to-day maintenance of the property. They can be deducted from the gross profits at the end of the tax year to arrive at the net profit.
We've summarised typical capital and revenue costs in the handy tables below.
Capital costs
Here are some typical capital costs that can be claimed when selling a property.
| Capital expenses | Description |
|---|---|
| Property purchasing expenditures | Including solicitors costs and survey costs from when the property was initially purchased. |
| Stamp Duty Land Tax | From when the property was initially purchased. |
| Property enhancement | Value added to the property, such as building an extension, adding an en-suite or reconfiguring the layout. |
| Estate agent fees | From selling the property. |
Revenue costs
The following table lists typical revenue costs that can be claimed at the end of the tax year.
| Revenue expenses | Description |
|---|---|
| Property repair, replacement & maintenance | Such as kitchen & bathroom fittings, windows, doors and boilers. (Must be like-for-like replacements. For example, any substantial upgrade in the kitchen or bathroom would be seen as a capital upgrade.) Also includes maintenance costs, such as cleaning and gardening. |
| Property business management costs | Including business insurance, accountancy fees, advertising, letting agent fees, membership charges of landlord/property associations, and stationery. |
| Furniture purchase | If replacing furniture already in the property when purchased. |
| Travel, hotel accommodation, food & drink | Whilst away on business/visiting properties. Mileage is 45p per mile for the first 10,000 miles per tax year and 25p per mile for all miles thereafter in a car. These expenses are only claimable for yourself and your employees. |
| Legal fees | Including those associated with mortgage/re-mortgage arrangement costs. Also includes extending leases of up to 50 years, preparing contracts and preparing deeds of trust. |
| Computer & mobile phone costs | If an expense, such as a mobile phone, laptop or tablet, is not used 100% of the time for running the property business, a proportion of the cost can be claimed. |
| Utility & Council tax costs | Utilities (water, electric and gas) and council tax can be claimed if the property is empty. |
Non-deductible costs
The following costs cannot be claimed as an allowable expense.
| Non-deductible expenses | Description |
|---|---|
| Property purchase costs for aborted deals | For example: legal costs, mortgage arrangement, travel costs etc. for properties either not purchased or rented. |
| Mortgage capital repayments | Only the interest element of a mortgage can be claimed, not the total repayment cost. There are different rules for landlords who personally own residential property when it comes to claiming mortgage interest due to the section 24 tax change. |
| Furniture purchase | If not already in the property at purchase. |
Mortgage interest costs
The treatment of mortgage interest cost varies between personally owed and limited company portfolios.
As a limited company, your mortgage interest is viewed as a business expense which can be deducted from your total amount of taxable profit, reducing the corporation tax you’ll pay.
For personally owned portfolios, you'll need to consider Section 24.
Section 24 mortgage interest relief
If you personally own a residential buy-to-let property, you will be impacted by the so-called “section 24” tax changes, which will increase the amount of tax you pay on your rental income.
From April 2021, income tax relief landlords receive for residential property finance costs (mortgages) will be restricted to the basic rate of tax. This means that the amount of income tax paid on rental income will increase as a result, particularly if you become a higher or additional rate tax payer.
That's all folks!
We hope this guide has been a useful introduction to property tax. If you have specific questions about property tax or are starting up your property business and need advice, book a consultation with our team of accountants today. No matter how you prefer to invest in property, Provestor has the expertise you need. Our all-inclusive service includes everything you need to manage your portfolio's finances and taxes.
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