Expenses Landlords Typically Forget To Claim

Lee Sharpe looks at some expenses that many landlords do not realise that they can claim.

This article will look at some of the expenses that are often missing in landlords’ expenses claims, so that they end up overpaying tax on their property profits or gains. 

We shall be looking at this primarily from the perspective of a buy-to-let (BTL) landlord who runs their own business, so is paying income tax; the rules can differ under corporation tax. There are also some differences between what most advisers would consider ‘normal’ expenses and those claimed under the newer ‘cash basis’.

I have often heard landlords say that their own accountant has advised them that expenses incurred before a newly-acquired property has been first let cannot be claimed. This is not true. There are two parts to this.

Firstly, the vast majority of landlords have only one property business for income tax purposes, even if they have several properties. There is only really one period before the property business starts, and that is before any property has been let. There is a specific provision in the tax code for expenses incurred before the letting business properly starts, which allows those expenses to roll up and be claimed on the day the business commences.

Secondly, while it is true that capital improvements should not be claimed as an ongoing expense in a property business, it is nonsense to suggest that maintenance expenses incurred before letting a newly-acquired property must be capital. A new ‘iceberg’ basement extension is, of course, capital and cannot be claimed (until the property is sold – see below); a lick of paint, repairing or replacing plumbing or kitchen fittings is just good manners.

Everyone knows that you cannot claim capital allowances in a BTL business because they are available only to commercial properties and not to dwellings. But actually, the prohibition applies only to items used in dwellings let out in the property business. If the business has assets elsewhere, such as a computer, office equipment or tools, these are eligible for capital allowances (the rules for capital assets are dealt with differently under the cash basis). 

Capital items such as office equipment and furniture may have capital allowances claimed on them. But there are other office-related expenses, typically orienting around computer consumables, postage and stationery, which are often overlooked when calculating property business profits. 

The cost of operating a property business from one’s home should not be underestimated, either – although it easily can be if you use HMRC’s recommended £4 per week (for employees) or up to £26 a month (for the self-employed working from home under the simplified expenses regime). 

Strictly, neither of these published rates actually applies to landlords, although modest claims on such bases will normally be allowed. But the real cost of running a business from home can be much more substantial when considering that an appropriate percentage may be claimed of:

Where landlords let properties through an agent, business-related travelling costs may be minimal, and relate only to occasional visits to advisers, agents or to acquire stationery. But other landlords will visit their properties frequently, such as where they collect their own rents or do their own maintenance work. 

If a client lives overseas but occasionally travels to the UK specifically to deal with their property portfolio, travelling costs might be infrequent but very substantial – and still allowable. See, for example, the case Mallalieu v Drummond [1983] 2 AC 861, wherein LJ Brightman set out what I like to refer to as the ‘stethoscope versus Speedos test’

Taxpayers often neglect to claim deductions for expenses that were unsuccessful, such as legal costs of evicting a bad tenant or pursuing debts. Whether or not the effort was successful is largely irrelevant. Simply put, it is not the outcome of the expenditure that matters, but the intention or purpose of the expenditure. 

While landlords tend to focus on saving income tax and the ongoing costs of running a property business, there is also potentially a great deal of tax to be saved by ensuring all relevant costs are claimed on the capital disposal of a property. Capital gains tax (CGT) on residential property is as much as 28%, so reducing the capital gain with eligible costs is a worthwhile exercise.

Typical costs of acquisition will include legal fees and stamp duty land tax (or equivalent). These should be added to the allowable cost of the property for CGT purposes.

Costs incurred in disposing of the property are normally deducted from the proceeds of sale, so as to reduce the chargeable gain. They will commonly include: 

This is an area that often gets overlooked because:

There are several areas of expenditure that are often overlooked, either when working out the property business profits or the capital gain on sale. Particularly when it comes to a sale several years down the line, keeping decent books and records can be vitally important. 

One final point to bear in mind with regard to claiming for capital improvement costs is that the improvement must still be there at the time of the sale/disposal. For example, if Bill paid £20,000 to add a conservatory to one of his rental properties in 2005 and then knocked it down in 2016, he will get no reduction against his capital gain when he sells it in 2018 (although, if the conservatory were ugly enough, he might get a deduction for the costs of demolishing the conservatory, if he can say that removing the eyesore enhanced the property…?!).